Technology plays an increasingly important role in our lives, and while many of us might be used to the likes of Siri and Alexa helping us with our day-to-day tasks, having robots help us with our finances isn’t necessarily something that’s front of mind.
But the technology exists, and although it’s still a growing market more and more people are now turning to it to assist with their investment strategies. So, what exactly is it?
What is a robo-adviser?
Robo-investment tools or robo-advisers, are a kind of digital platform that automates the investment process. Using algorithms, a robo-adviser will create a portfolio for you based on your answers to a series of questions, such as your age, when you’d like to retire and how risk-averse you are.
After making your first contribution, which is typically done either monthly or as a lump sum, the robo-adviser then invests on your behalf. After that, you don’t have to do much, if anything, else. You can all but forget about it, and let the technology take care of managing your portfolio.
It sounds simple, but is it too good to be true? Here we’ll weigh up the pros and cons of using robo-advisers, and whether they’re something you should consider for yourself.
The benefits of robo-advisers
1. They’re easy to use
One of the biggest benefits is that a robo-adviser makes things simple. You’ve got someone (or something) to choose your investments for you – all you need to do is create an account and answer a few basic questions to provide the system with the information it needs.
The user interfaces are generally very straightforward and easy to navigate on a mobile device, and the services are available 24/7 so you’re not restricted by time.
They also don’t require you to have a lot of cash to get started. The minimum asset requirements can be as little as hundreds of pounds, making it a quick and accessible route into investing.
2. They’re accessible
Robo-advisers are an accessible option and make investing available to those who wouldn’t normally go to a financial adviser – although it’s important to note that a robo-adviser is not a replacement for one.
3. They can be tax-efficient
Most robo-advisers offer ISAs, which are a tax-efficient way of investing. They can also include a number of tax-efficient features, one of them being tax-loss harvesting. This involves selling investments at a loss to offset gains and reduce your tax liability.
The other is automated asset location. This is an investment strategy that involves managing multiple accounts with different tax profiles as a single portfolio.
The drawbacks of robo-advisers
1. They’re self-advised
While robo-advisers provide a service, they don’t provide any context – which is a crucial element of financial success. Apart from your investment portfolio, which is built for you on your behalf, the rest of the decisions still lie with you.
You’ll still be responsible for things like your contributions (and increasing them) and for not making any irrational investment choices that can be tempting when the markets are turbulent.
2. They’re less personal
As of yet, robo-advisers haven’t quite mastered the art of personalisation. Apart from the questions you answered at the sign-up stage, they have no knowledge of your personal circumstances and what you’re looking to achieve from a lifestyle perspective.
There’s more to your financial goals than simply your attitude to risk, and a robo-adviser can’t cater for it all. It won’t be able to offer personal finance advice or help with any concerns or worries you might have. And of course, you won’t have face-to-face contact or the opportunity to pick up the phone and speak to someone, which can play an important role in financial wellbeing and confidence.
3. They don’t guarantee performance
While this can be true of any investment, automated ones don’t guarantee any returns. You might make money, or you might lose it – the risk is still there. The marketing that surrounds robo-investing and its simplicity can sometimes make it seem like it will be easier to see results, but this isn’t the case.
What’s the verdict?
Despite the appeal of their simplicity, robo-investment tools simply aren’t a substitute for a real financial planner or adviser. They can’t educate you on your finances or help keep your investments aligned with your goals, so if at any point you’re unsure of what to do they won’t be able to point you in the right direction.
Most robo-advisers simply offer investment management, not a comprehensive financial planning service. While such tools might be a good option for those looking to gently dip their toe into the world of investing, those who would like to explore their investment options more seriously should seek proper financial advice.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
