What is robo-advice and how can it provide low-cost financial planning?

In the new era of artificial intelligence, you might think the term “robo-advice” means something very sophisticated. But it was invented more than 10 years ago, as a relatively low-tech, lower-cost alternative to traditional face-to-face financial advice. Today, it still refers to digital wealth management services that come with apps and tools to help choose suitable investments.

What are the advantages of robo-advice?

Although there are benefits to having an experienced financial advice professional at your beck and call, and developing a personal relationship with this trusted person, it can also be very expensive, often running to thousands of pounds a year. But, at the other extreme, not everyone is cut out to be a do-it-yourself investor. Many people don’t have the time, knowledge or confidence to choose their own investments using a DIY investment platform (a type of broker, or supermarket, for investors), such as Hargreaves Lansdown or Interactive Investor. 

A robo-adviser offers a middle ground between face-to-face advice and the DIY route. Robo-advisers take the form of online questionnaires or quizzes that guide customers through simple investment choices, based on their appetite for risk. They then put the strategy that is chosen into action, acting as a kind of investment ‘autopilot’. The hope is that customers can sit back and watch their investments grow, without having to devote much of their own time or effort.

What are the limitations of robo-advice?

However, robo-advisers are not able to make intelligent decisions themselves, they simply select the solution that best matches the customers’ responses.  

“Robo-advice is not yet AI choosing investments and beating the markets,” says Jeremy Fawcett, head of Platforum, an investment distribution research consultancy. “Robo-advice is still in version 1.0, meaning it’s a risk/advice/guidance journey, delivering a portfolio.”

Who offers robo-advice?

In that initial form, several independent companies came to market more than a decade ago. One of the best known is Nutmeg, which launched in 2012, and grew organically to the point where it was acquired by JPMorgan Chase in 2021 for an estimated £700mn. 

Nutmeg is considerably larger than its competitors, but the robo-advice sector remains small. “It hasn’t delivered the promise from a decade ago, when we saw these companies coming to market in the UK,” says Fawcett. “The challenge for those companies has been acquiring customers at expense and then finding ways to make money from them.”

How popular are robo-advisers?

Research provider Platforum says the total UK direct-to-customer (D2C) investment market had £385bn of customers’ assets as at September 2022 — the latest available figures. But, within this, the digital wealth manager segment, which includes robo-advisers, had only £8.2bn. Boring Money, a research and consultancy service that also helps consumers navigate the sector, puts the robo-advice market share slightly higher, at 4.6 per cent, or £16.8bn of customers’ assets. 

It seems the big advantage for beginner investors — that robo-advisers allow you to get started with very little money — also means that it is difficult for these companies to thrive and grow. Many companies have an average customer investment of less than £10,000. 

Holly Mackay, founder and chief executive of Boring Money, calls it the “robo paradox”.

She says: “They do well because they are nimble, have smaller compliance teams and better apps. They grow fast — but by customers, not by pounds. The return on investment is super-long because average account sizes are very low. Impatient private equity people get grumpy and capital gets scarce. Big brands with products to sell and longer timeframes acquire them. The robo becomes less nimble, gets a bigger compliance team, and has to wait in a queue for tech drops.”

How much does robo-advice cost?

Fees for robo-advice, though generally far cheaper than their human counterparts, still vary, both in terms of the “advice” element and the costs attached to the selected investments. 

The five robo-advisers most recommended by Boring Money’s website users are: Plum; Moneybox; Moneyfarm; Nutmeg; and Wealthify. These have costs per year for investing a sum of £10,000 in selected funds or portfolios of exchange traded funds (ETFs) that varying from £62 at Moneyfarm to £106 at Plum. The fee structures can be quite complex, however: Plum offers a free starter rate, while others, such as Moneyfarm, have a tiered structure that gets cheaper the more you invest. 

Their distinguishing features also vary, with Plum using AI to help its customers boost saving, while Moneybox has an auto round-up facility on spending in linked bank accounts that customers can switch on to help increase savings. Moneyfarm stands out for its app and tools, according to Boring Money’s customer reviews, while Nutmeg offers a large investment choice, including the option to have a pension and Lifetime Isa. 

What makes a good robo-adviser?

“Users of robo-advisers are most likely to value a competitive price, a decent app and a simple journey from investigation to action,” says Mackay.

However, going with a robo-adviser’s choice of investments is no guarantee of achieving returns. Boring Money reports that recent stock market turbulence and consumers tightening their belts in response to the cost of living crisis have made the performance of robo-adviser portfolios a growing concern for many. Its research has also found that net returns from robo-advisers can vary by up to about 16 per cent for a similar risk profile.

Meanwhile, many investment services from retail banks are now similar to robo-advisers’. There are also a host of so-called neo brokers — the likes of Freetrade, Trading 212 and eToro — which have attracted younger consumers with zero-fee share dealing transactions and the facility to open an account with as little as £1, and to make trades starting at £10. 

In future, therefore, this sector of the market is likely to look very different, in terms of players and maybe service. “Robo Mark Two will be the integration of AI alongside nice human beings to reassure nervous consumers,” predicts Mackay.