What are robo-advisers?
Robo-advisers are online investment management platforms that use algorithms to invest clients money with minimal human interaction.
Sounds complex! It’s actually much more simple than it sounds – you fill out a short quiz online, about 10-15 personality based questions (and who doesn’t love a personality quiz!) which determines how you feel about risk and then matches you with an investment profile accordingly. Some people are super cautious and will fret about any short term losses (volatility) whereas some are happy to weather some storms for the prospect of improved investment returns over the long term – it all depends on you! In terms of what you get profiles are generally split into low, medium and high risk investment portfolios and the more comfortable you feel with risk, the higher the proportion of equities or stocks you are allocated in your investment portfolio, the rest will be made up of less risky investment vehicles such as bonds.
Which companies are there to choose from?
There are lots of UK companies to choose from – the main ones being Nutmeg and Moneyfarm, although alternative companies include Scalable Capital, Evester and Moneybox. The main things to consider are how much you can afford to initially invest, the management fees and performance history – but as robo-advisers are relatively new to the market they only have a few years trading history to review.
Each company asks for different minimum starting investments which might help you choose who you would like to invest with depending on what you can afford – you can invest with Nutmeg with a £500 initial investment followed by monthly regular payments but with Moneyfarm you can open your account for just £1. The fees also differ – Nutmeg charge 0.75% management fees on investments up to £100k for their fully managed portfolios, whereas Moneyfarm charges just 0.30%.
Why use a robo-adviser?
Robo-advisers are usually much cheaper for the customer than traditional financial advisers in terms of management fees but most importantly they also allow you to invest small sums of money. Traditional investment houses often require thousands of pounds as a minimum to invest which lots of millennials simply don’t have but are curious about investing and want to dip their toes in the heady world of stocks and shares.
The main advantage is the diverse portfolio robo-advisers give you by using ETFs (exchange traded funds). These funds act like traditional tracker funds but can be traded like individual stocks, this allows brokers to spread your investments globally and across different forms of investment to create a diverse portfolio which reduces the overall risk if one sector performs badly.
You also have a lot of control, its pretty easy to change the risk level of your portfolio up or down depending if you feel uncomfortable with your current risk portfolio or just feel a bit more adventurous. When I started I had a medium risk portfolio but have increased this to a high risk portfolio now I feel a lot more comfortable with the stock market and am seeing much better returns. One thing that I have learnt is that risk or volatility is just how the stock market works – there will be days when the FTSE does not perform and the value of your investment drops, that doesn’t mean you lose all your money – realising this has helped me with my investment confidence and encouraged me to invest more.
Digital services are quick and easy to use and most have apps so you can keep track of your finances and see your money growing from your phone. It also allows you to automate your finances by setting up direct debits. This means its to easy become a regular investor & with a little bit of time you will start to see the pounds compounding by themselves.
Who should choose a robo-adviser?
Anyone! Setting up an account with a robo-adviser is usually pretty simple. I think they work particularly well for anyone who is keen on investing but short on time to pick their own investments, anyone who is a first time investor looking to build confidence in the stock market and gain some knowledge and anyone who is looking for a low cost platform with a small initial pot to invest.
All in all, I really recommend robo-advisors for any millennial looking to grow their money – I will write a separate article about Nutmeg who I use as I really love their platform and want to review it properly.
Please let me know your thoughts on robo-advisers & comment if you’ve enjoyed the article!