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5 Things you need to know about Robo-Advice

Everything you need to know about the investing world’s latest buzzword, including why it’s not a helpful name at all
5 Things you need to know about Robo-Advice
Reading time: 4 mins

The terms robo-advice and robo-investing are becoming more and more common in the world of finance, but what does it actually mean?

It’s investing by another name

Not that you’d guess from the term itself, but robo-advice services in the UK are predominantly investing services aimed at helping people with little or no previous experience, by taking some of the effort and cost out of investing. Also known as online investing services, or digital wealth managers, they perform comparable services to traditional wealth managers such as JP Morgan, Barclays Wealth or Brewin Dolphin. They build you a plan (i.e. portfolio) made up of investments from across the globe that are appropriate for the amount of risk you want to take, then manage it for you. A major advantage of the ‘robos’ is that, unlike many traditional wealth managers, you can start investing with small sums – as low as £1 in certain cases. Everything is simple and transparent too, with 24/7 access to your investments via your phone or app, and low management fees. So, getting your investments managed by experts has never been easier.

It’s a smart choice for beginners and busy people

DIY investing has seen its own explosion in popularity in recent times, and online services have made it relatively easy for anyone to have a go at buying and selling their own investments. But, for those with limited knowledge of global financial markets, or little time to manage their portfolio on a regular basis, it’s not always the most appropriate solution. Added to which, fees and charges can add up quickly, making it a potentially expensive exercise that ultimately eats into your returns. Enter the ‘robos’, online investment services that build and manage an investment plan for you, for typically less than 1% a year in fees and fund charges combined.

‘Advice’ doesn’t mean advice

The label robo-advice hasn’t travelled very well. In the US, where such services first emerged, ‘robo-advice’ tends to mean ‘we do the investing for you’, not financial advice, as it is often assumed in the UK.

Here, ‘robo-advice’ services don’t tend to give advice at all, although some give ‘simplified advice’ limited to one or more specific needs, such as recommending an investment risk category.

It’s not really a robot, either!

The common assumption about ‘robo’ services is that robots are calling the shots. The reality is that it’s more mathematical than mechanical. Most robo-advisers employ an algorithm (a set of rules to be followed in a calculation) to power some element of their service, but usually, the investing decisions are reassuringly human, and the robots are simply doing what they’re best at, processing large amounts of information far quicker than humans can. In the US, where robo-advice began, some services are fully-automated, taking all human bias out of investing decisions, which some argue is the best way to ride out market volatility. Whatever the process, the one thing all robo services have in common is that they use technology to keep costs down, which are passed on to customers through lower fees.

(we think) It’s the future of investing

Traditional wealth managers target the very wealthy, and their services tend to be characterised by high minimum investments, high fees and commissions and complicated sign-up processes.

The new digital wealth managers are changing the market for the better, opening up the world of investing to more people than ever. With low minimum investments, quick sign-up, and easy to use apps, they are the investing equivalent of modern online banking services, providing 24-hour access to investments, full transparency of fees and performance data, and flexibility around payments and withdrawals. Although relatively new on the wealth management scene, robos are already making waves and analysts KPMG, predict the market could be worth US$ 2.2 Trillion1 by 2020.

Anyone dubious of the robos’ ability to generate equivalent returns to those of the traditional investing services need only to look at their track record to date. Wealthify, for example, beat its ARC benchmarks across all five model portfolios in their first year, in other words generating higher returns than the industry average. Of course, it’s important to remember that past performance is not a reliable indicator of future results.

 

 With investing your capital is at risk and you may get back less than you put in.

 

 

1 Source: Fintech News: Robo Advice Platforms Will Manage US$2.2 trillion Worth of Assets by 2020

 

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