Are you stuck in the advice gap, not willing to pay a substantial fee for financial advice but not willing to go it alone constructing a DIY portfolio of investments?
Then you are the target market for the robo-advisers — online management services, first pioneered in the US, that use a mix of algorithms and technology to create an investment strategy.
These services, with quirky names such as Money on Toast, establish a customer’s investment goals and appetite for risk and then offer a ready-made solution.There is almost no human involvement, although some businesses employ teams of flesh-and-blood investment specialists to set guidelines for stockpicking, and others do have human beings on hand where needed. This dramatically lowers the cost of advice.
A traditional business offering face-to-face advice will require a 3 per cent fee upfront and make an annual charge of about 2 per cent (which includes a number of fund fees). So if you entrust such a business with a lump sum of £100,000, this means £3,000 at the outset and about £2,000 thereafter each year will be lost to the adviser. With a robo-adviser, you could pay as little as £1,000. Most services are relatively new, so they are untested in potential tough times, such as a stock market crisis.
Some robo-advisers have novel ways of making you save more, such as True Potential with its impulse saver app. Decide not to buy that cappuccino and croissant on the way to work? Then you can put the £5 you saved into your investment pot.
Robo-advisers were discussed by the City watchdog this week amid fears that they may spell the end of financial advice firms. This threat has already led some traditional players to add some robo-elements to their services.
There is potential for millions of people to become customers of the robo-advisers. Jason Hollands, of Tilney Bestinvest, the wealth manager, says: “What they are after is the equivalent of a flat-pack solution — a kit with step-by-step instructions that they can follow that helps them obtain a sensible investment portfolio.”
With the help of Holly Mackay (below, inset), of Boring Money, the online investment service, we examine what is on offer.
This was the first digital DIY investment service off the block in the UK. The team runs ten different portfolios, which are allocated into a range of tracker funds (those that mimic the performance of a particular stock market index, such as the FTSE 100) and other investments, such as multi-asset funds (that hold a mix of shares, property and cash).
– Choose a timeframe for investing and say how much you have.
– Annual charges start at 1 per cent of your savings, but reduce with volume.
Boring Money says: “Nutmeg founder Nick Hungerford has the Silicon Valley glasses, attitude and website. It’s slick, easy to use and has been a trailblazer, but it’s still pretty new and, as with the other robo-advisers, it’s too soon to judge performance.”
The brainchild of a large financial advisory brand, True Potential is a relatively new investment service that features an Impulse Saver app to help you top up your savings with “loose change” whenever you like.
– Pick from five different risk profiles.
– Each risk profile has between two and eight “multi-asset” fund options to select.
– Choose from a range of tracker and actively managed funds.
-Annual charges for funds range from 0.65 per cent to 0.90 per cent. An additional platform fee of 0.40 per cent is charged (the platform is the online account that holds your money).
Boring Money says: “This is quite easy to set up and the website is great, although there are still a few choices to be made about the funds in each risk profile, which might put some off. The Impulse Save app is great.”
Wealth Horizon has a twist. Although you will act as a DIY investor, there is an associated advice service with an adviser ready at the end of a phone when and if you need one.
– Requires completion of a fuller financial questionnaire.
– You can pick from ten risk profiles.
– An adviser needs to give the green light before you can proceed.
– Annual charge of 0.13 per cent for a typical passive portfolio. There’s an extra fee of 0.75 per cent for the advice and the platform charge — there may be an additional set-up fee for any advice.
Boring Money says: “Some people may find all the hand-holding and checking by an adviser a bit slow. However, it could be a really great hybrid service for many less confident investors. It’s a very low-cost way to invest and access regulated advice.”
The Tilney team runs a suite of four fund portfolios, with risk levels ranging from cautious to aggressive. They are a mixture of active funds, index funds and cash. Ben Earnshaw, a Tilney customer, says: “You decide on the risk level and Tilney puts you into the correct portfolio and rebalances it periodically while keeping you constantly informed.”
– Annual charge ranges from 1.47 per cent to 1.59 per cent.
– Four risk levels.
– No additional platform fee is applied — these costs are included in the above fees.
Boring Money says: “Nice and simple, easy to set up, a good solid range of decent brands, and although the costs look expensive for any hardcore DIY-ers, they offer OK value for those needing a bit more help. ”
Fidelity gives you access to both tracker and active options, as well as a choice of Fidelity and other funds.
-Five risk levels.
-Annual charges range from 0.25 per cent to 1.5 per cent.
– A platform fee of 0.35 per cent up to £250,000 also applies.
Boring Money says: “The tracker portfolios offer a low-cost way to stick a toe into the water. The active funds start to look a bit pricey at 1.85 per cent all in. The website is fairly clear and the team on the phones are good.”
Justin Modray, of Candid Financial Advice, the low-cost financial adviser, says: “There is little doubt about the need for low-cost quasi-automated advice, so it’s good to see companies entering the market. However, they are not a panacea since they won’t review your full position or consider issues such as whether to transfer an existing pension. Check these services don’t tie you to an expensive investment platform or funds.”