Think of a robo-advisor and it might conjure up an image of R2-D2 popping round to talk you through your investment options over a cup of tea.
In reality, robo-advice isn’t quite that exciting. No robot will visit you in your home – instead you log onto an online wealth management service which steers you in the direction of investments which might be suitable for you. All you usually need to do is answer a few simple questions and the site will come up with an appropriate investment portfolio or pension plan for you based on your responses.
Bear in mind that despite these services being referred to as ‘robo-advice’ you don’t actually receive financial advice, so critics argue that giving them this label is misleading. Essentially these services can only really point you towards a portfolio of investments based on the information you’ve provided them with – it’s ultimately you that chooses what to buy. They almost certainly won’t help you with things like tax planning or working out how and when to take your pension, which are the complex parts of a human financial advisor’s role.
Here, we explain in more detail how robo-advice works, what the various services offer, and what to watch out for.
Robo-advisors explained
Professional financial advice can not only be expensive, but is also generally only accessible to those with significant savings. That’s not to say it doesn’t play a vital role, and many people benefit hugely from having an advisor manage their cash.
But for those who can’t afford to pay an advisor, or perhaps only have small sums to invest, there is often an ‘advice gap’ which robo-advisors aim to fill.
These services usually provide a selection of ready-made investment portfolios, some of which are aimed at novice investors, whilst others target more sophisticated investors, who might be comfortable accepting a higher level of risk in the hope of potentially higher returns.
You’re directed to a portfolio that should be suitable for you after answering a series of questions. These questions typically focus on your approach to risk (how much can you afford to lose), your financial objectives, and your investment timeframe (how soon you might need to access your money). The robo-advisor will then use algorithms to help them work out which investment options could be suitable for you.
There are still fees to pay if you use a robo-advisor, but because there’s no human interaction involved, costs are typically lower than if you were to use an independent financial advisor (IFA). Costs to invest with a robo-advisor typically tend to be in the region of 1% a year, but may be more or less than this depending on the amount you invest. Costs in the financial world are notoriously difficult to understand and compare like for like, as this 1% a year also usually includes the platform fee for ongoing management of your investments, as well as the fee for the robo-advice.
Remember that because your cash is going into investments, there are no guarantees that you’ll get back what you put in, as the value of these investments can fall as well as rise. Unlike in a savings account, the amount you invest – your capital – is at risk.
How do the different robo-advice services compare?
There are numerous different robo-advice services to choose from, so it’s essential to do plenty of research before choosing one.
Here’s what some of the bigger online wealth management services offer. All of these services are authorised and regulated by the city regulator the Financial Conduct Authority (FCA). Bear in mind that these are just some of the services which are available, so it can be advisable to do your own research and explore any other options when deciding which one you want to use.
Nutmeg
Nutmeg is the UK’s largest robo-advisor and currently has £2 billion funds under management. When you sign up to the service, you’ll be asked about your risk appetite and personal goals. You’ll then be offered a portfolio that’s suitable for you, based on the information provided.
Products offered: ISA, Lifetime ISA, Junior ISA, pension, general investment account.
Minimum investment: £100 for a Lifetime ISA, £500 for a general investment account and ISAs, £500 for a Nutmeg pension.
How much does it cost: Fees are charged on a sliding scale depending on the amount you invest. For a fully managed portfolio, proactively managed by Nutmeg’s investment team, fees are 0.75% up to £100k and 0.35% for balances over that, including Value Added Tax.
Nutmeg is currently offering Rest Less members who open a Nutmeg portfolio to waive all portfolio management fees for the first 12 months. Learn more about this offer here.
Evestor
Evestor is an investment platform which focuses on passive investments, or investments which simply track market indices, such as the FTSE 100 Index of Britain’s biggest companies, rather than having an investment team who are trying to outperform the index. The aim of this approach is that costs can be kept to a minimum.
Products offered: ISA, pension, general investment account. Once you’ve chosen a product, you can pick from three diversified portfolios, one low risk, one medium risk and one high risk.
Minimum investment: You can start investing from £1.
How much does it cost: Annual fees range from 0.47% ro 0.49% depending on which portfolio you choose.
PensionBee
PensionBee was founded in 2014 and more than £1 billion has been invested through them. You can transfer and combine a number of different old pensions into a new plan – into which you can make further contributions if you wish. PensionBee’s pension plans are managed by some of the world’s biggest money managers, including HSBC, BlackRock and Legal & General.
Products offered: Seven different pension plans, designed to meet different investment needs. Plans include a Tracker pension, which follows the performance of the world’s markets and a Future World plan that puts your money into companies that pledge to be environmentally friendly.
Minimum investment: There’s no minimum contribution limit.
How much does it cost: Annual fees range from 0.50% to 0.95% depending on the pension plan you choose. Your fees are halved for any amount above £100,000. For example, PensionBee’s Tracker Plan costs 0.25% for any amount over £100,000 – the cost below this amount is 0.50%.
PensionBee is offering Rest Less members who transfer at least one pension to them a £50 Amazon voucher. Learn whether transferring a pension could be right for you in our article Should I consolidate my pensions? and claim your £50 voucher here.
OpenMoney
OpenMoney was originally part of evestor before its services were split into the ‘do-it-yourself’ evestor investment service and OpenMoney, which is its financial advice arm.
OpenMoney aims to help people across their whole financial journey, from getting their finances under control to making long-term investment decisions. Whereas some robo-advisers can only offer guidance to help you narrow down your options, OpenMoney is authorised and approved by the FCA to give financial advice and so can recommend whether investing is right for you.
Products offered: Stocks and shares ISA, personal pension, general investment account. Based on your goals, OpenMoney will tell you which products to invest in.
Minimum investment: You can start investing from £1.
How much does it cost: There’s 0.25% annual fee for managing your investment and a 0.10% charge for investing in a product wrapper, such as a Pension or ISA. There are also portfolio fees as your investments are managed on a discretionary basis, which are typically around 0.10% but may vary, as well as transaction costs, when investments are bought or sold. Typical annual fees range from around 0.46% to 0.49% but may be more or less depending on your individual portfolio.
Wealthify
Wealthify is backed by Aviva, the UK’s largest insurance provider, and says its aim is to make investing affordable and accessible for everyone. It uses algorithms and industry experience to pick the best funds available.
Products offered: ISA, Junior ISA, general investment account. Once you’ve chosen your product, you can build an ‘Original Plan’ which will comprise a portfolio of investments that track different markets and are chosen to suit your goals and approach to risk. Alternatively, you can invest in one of five ‘Ethical Plans’ where your money goes into a range of investments that aim to have a positive impact on society or the environment.
Minimum investment: You can start your ISA, general investment account, or Junior ISA account with £1 and open a pension with £50. You can then choose if you want to make additional one-off or regular monthly payments. There’s no minimum top up amount for a Junior ISA, ISA or general investment account, but each payment to your pension needs to be at least £50.
How much does it cost: Average annual costs are 0.82%, but this can vary depending on which investments you hold.
When you should seek professional financial advice
Whilst robo-advice can be a good option for those who don’t need or can’t afford tailored investment advice, if your financial affairs are complex, or if you’re not sure whether investing is right for you, you may benefit from speaking to a qualified financial advisor directly.
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.