In various industries, technological innovation led by disruptors is changing the way consumers use and pay for goods and services. The retailing sector, as an example, has been transformed by Amazon, which has successfully managed to generate huge profits by undercutting competitors and delivering a high level of service that meets consumers’ needs.
Wealth management is not immune from the threat of new incumbents: the so-called robo-advisers are the new kids on the block, attempting to steal market share from the more established names.
The name, however, can be misleading, as most robo-advisers do not provide fully regulated financial advice. Instead, most offer ‘simplified advice’, meaning the recommendations are limited to a certain number of ‘solutions’. In other words those who go down the robo route are not getting tailored or bespoke advice, as these businesses do not consider an individual’s entire financial circumstances.
Instead, robo-advisers use algorithms to provide automated financial planning for investors. While differing to various degrees, most use little to no human oversight. Instead, based on an initial set of questions or a questionnaire, investors’ cash is placed into a ready-made portfolio that is deemed appropriate for the level of risk that they and other similarly minded investors are willing to take.
Robo-advisers are less than a decade old, but have already made their mark in the US, led by Betterment and Wealthfront, which have $10 billion (£7.4 billion) and $7.5 billion of assets under management respectively. In the UK robo-advice has so far failed to gain the same level of traction, but the market is still in its infancy, with a flurry of new entrants opening up shop over the past couple of years. Below, we consider the main players, while also giving some initial thoughts on each of the offerings.
Nutmeg, the most established robo-adviser in the UK, has a minimum investment of £500. On any amount from that up to £100,000, customers are charged 0.75 per cent for a fully managed portfolio and 0.45 per cent on a fixed allocation portfolio, which as the name suggests does not tinker with investment selections except when a client’s ‘risk profile’ changes. Those with £100,000 or more to invest are charged 0.35 per cent for a fully managed portfolio and 0.25 per cent for a fixed allocation portfolio. To keep fees low, Nutmeg primarily invests in exchange traded funds (ETFs), with the average fund charge coming in between 0.17 per cent and 0.19 per cent. It offers only simplified advice which means, in its words, that advice is ‘limited to one or more of a customer’s specific needs’.
Money Observer’s thoughts: The buy and hold fixed allocation portfolio option is a di¬fferentiator, but those seeking lower charges can find them elsewhere.
Scalable Capital requires a minimum of £10,000 investment. For this it has an annual fee charge of 0.75 per cent, with an added average cost of 0.25 per cent for fund charges. The robo-adviser invests in a wide range of assets, from equities to property, via ETFs, depending on what it deems suitable for each customer. Scalable calls its services a ‘discretionary investment service’. This means that by law its portfolios have to be suitable for the client and their investment objectives, limited to one or more of that client’s specific needs. Rebalancing and investment decisions are carried out at the discretion of the investment manager. (As of January 2018, Scalable Capital now also offers its clients traditional advice conducted by qualified financial advisors)
Money Observer’s thoughts: The major downside is that its 0.75 per cent annual fee is at the upper end compared to other robo-advisers. Unlike others, it does not o¬ffer lower fees for higher investment amounts. Against that, Scalable Capital has an extensive content hub filled with guides and articles, enabling customers to stay informed.
You can start investing with Moneyfarm for as little as £100. Up to the first £20,000, fees are 0.7 per cent per year. Fees on the amount invested fall to 0.6 per cent for between £20,000 and £100,000, to 0.5 per cent for £100,000 to £500,000 and 0.4 per cent for anything over half a million. On top of these charges are the costs of investing in ETFs (its preferred investment product), which on average are 0.3 per cent. As with other robo-advisers, Moneyfarm gives simplified investment advice based on the customer’s outlined needs.
Money Observer’s thoughts: Moneyfarm’s £100 minimum investment amount is lower than most, while its flexible fees that change depending upon the amount invested will suit larger investors.
Wealthify allows you to access a risk profiled portfolio, with the minimum contribution just £1. It invests in both ETFs and index funds. On any investment up to £15,000, the charge comes in at 0.7 per cent, falling to 0.6 per cent for investment from £15,000 up to £50,000, where fees drop to 0.5 per cent. Fund fees are, on average, 0.19 per cent. Wealthify does not give financial advice and is not authorised to do so.
Money Observer’s thoughts: The company has a very low investment minimum, allowing first-timers to try out small amounts. Its fees are also relatively low.
Also with a minimum deposit of £1 is evestor. That, however, is not its main attraction. The total annual fee, including fund costs, is below 0.5 per cent. As with other robo-advisers, evestor invests in passive funds. The company offers an advised service, which picks both your investment wrapper and your portfolio after asking a number of questions. There’s also a non-advised service that allows customers to choose their own portfolio.
Money Observer’s thoughts: The annual fee is flat yet cheaper than rivals. The financial advice option will no doubt be popular with certain clientele.
One of the newest entrants, Moola launched at the end of 2016 and offers investments starting at £50. Regardless of the sum invested, the company charges a higher end 0.75 per cent flat fee. It invests exclusively in ETFs. Fund fees are deducted from ETF returns, meaning you don’t pay them to Moola and they won’t show on your list of transactions. However, the stated average fund fees are in line with the industry average of 0.2 per cent. It does not offer financial advice.
Money Observer’s thoughts: Moola’s total fees are at the upper end of the market, and as with Scalable Capital, they do not fall if larger amounts are invested, making it comparatively increasingly expensive.
You’ll need at least £500 to invest in an IG Smart Portfolio. The first £50,000 invested with IG will attract an annual fee charge of 0.65 per cent. Those with between £50,000 and £250,000 will pay an annual fee of 0.35 per cent, while those with over £250,000 pay just 0.1 per cent. For those with less than £50,000, the 0.65 per cent fee is slightly below industry average. Fund fees are 0.22 per cent. Once the questionnaire is answered, IG Portfolio helps the customer find a portfolio appropriate to their risk profile. This, however, does not count as full financial advice.
Money Observer’s thoughts: Unlike most other robo-advisers, the investment universe of IG is limited to iShares ETFs. However, IG boasts a ‘cheap as chips’ 0.1 per cent fee for investors with more than £250,000.
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