The word robo-advisers conjures up the image of personal androids designed to help you make investment decisions. The reality is not nearly as romantic but it is a new and growing area of the wealth management industry and something which could affect you.
What is Robo-advice and why is it on the rise?
Robo advice services are online-based platforms that ask you a series of questions in order to determine your risk level and guide you towards low-cost portfolios. It is a soaring industry in the US, where investors with smaller pots often choose an automated online platform over a more expensive face-to-face consultation with a wealth manager or independent financial adviser (IFA).
Now the Financial Conduct Authority (FCA) in the UK has announced it wants to create a regulatory "safe space" for companies in the UK to innovate and create similar offerings to UK investors. Since the Retail Distribution Review (RDR) in 2013, which has led to financial advice fees being levied up front rather than via ongoing commissions, many investors have been left feeling that they are unable to afford financial advice. The result has been a growth in interest in robo-advice offerings targeted at investors with smaller pots who want to invest but are unsure of how to go about it.
On 30 September 2015 economic secretary Harriet Baldwin said to an FCA robo-advice conference in London that the "exciting" thing about the trend was "that it has the potential to be much cheaper and quicker than face-to-face financial advice".
"Not only that, but it's also the kind of quick and simple online service we're using elsewhere in our daily lives - and which many in the millennial generation see as standard procedure," she said.
Research from Aegon shows that UK consumers are willing to pay on average £191 for advice when deciding how to invest a pot of £50,000 and only £314 when deciding to invest an amount five times that size. It means a gap is opening up between what people are prepared to pay for advice and what is on offer.
Who offers it in the UK?
But companies have not been quick to introduce new online advice options. In the UK the key figure in the industry has been Nutmeg, an online investment management company that allocates one of 10 risk-based portfolios of low-cost exchange traded funds (ETFs) to customers based on online questions. It charges 0.1 per cent on assets of £1,000 up to 0.3 per cent on assets of over £500,000.
But other wealth management companies are clearly considering their options. Fidelity has advertised for a programme manager to help build a discretionary and robo-advice service. Fidelity's advert said the company was looking to create a portfolio management service that could be used by advisers and clients looking to build investment portfolios with a specific aim in mind.
Model portfolios - the first step towards robo advice?
But companies have not yet followed in Nutmeg's footsteps and are instead choosing to offer model portfolios geared towards risk profiles without offering to place customers in a risk box. Ms Baldwin said other wealth managers were being put off by the high regulatory burden associated with offering advice. She said one company had told her that to comply with current regulation their survey would have to ask 247 questions.
This means that many execution-only stockbrokers and platforms are choosing instead to take the off-the-peg benefits offered by robo-advice (which matches clients' risk profiles to simple portfolios) without doing the risk analysis themselves. Those include AJ Bell Youinvest, which has launched a series of ready-made portfolios aimed at investors who cannot afford financial advice.
Russ Mould, investment director at AJ Bell, said demand for the portfolio service could indicate a groundswell of desire for robo advice, which the company would have to listen to. He says: "We will be taking a steer from demand from this service. If nearly everyone is going down the set-and-forget route (choosing a portfolio and sticking to it without making adjustments), then we would need to think about whether people actually want something more structured and would like a decision-tree option. If people take one of the three baskets and do not make changes it might be a sign that people do not feel sufficiently well informed and might need a helping hand."
But he said for now the portfolios would remain the furthest step towards a low-cost online option. "This is a genuine guidance service to give people a starting point and build a fund portfolio matching their appetite for risk," he said.
Cost comparison of online investment offers based on on £15,240 individual savings account (Isa) allowance
| Platform | Guided investment offer | Dealing charge | Annual platform charge | Annual investment charge | Total annual cost % | Total annual cost £ |
|---|---|---|---|---|---|---|
| AJ BellYouinvest | Global Tracker Portfolios | £29.70 | 0.00% | 0.22% | 0.22% | £33.15 |
| Hargreaves Lansdown | Portfolio+ | £0 | 0.45% | 1.38% | 1.83% | £278.89 |
| Fidelity | HeadStart portfolios | £0 | 0.35% | On average 0.8% | 1.15% | £175.26 |
| Bestinvest | Ready-made investment portfolios | £0 | 0.40% | On average 1.5% | 1.90% | £289.60 |
| Charles Stanley | Foundation portfolios | £0 | 0.25% | On average 0.7% | 0.95% | £144.78 |
| Interactive Investor | Ready-made portfolios | £10 | £80 | 0.75% | 1.27% | £194 |
| Trustnet Direct | Model Portfolios | £40 | 0.25% | On average 0.7% | 0.95% | £144.78 |
Source: AJ Bell YouInvest
