Not long ago, there were effectively two types of financial adviser. Those who would charge clients an up-front fee to dispense their advice, and those who were paid on commission. The latter would receive ongoing fees from the products they recommended, with the result that many clients had no real idea of how much the advice was costing them and some were under the mistaken idea that the advice they'd been given was free. So in 2013 the Retail Distribution Review, which aimed to improve the transparency of financial advice, did away with commission-based financial advice.
From then on, all advisers had to charge an up-front fee. That's all very well if you have a decent pot of money to invest paying a fee of £500 or £1,000 might not sound much if you're investing £100,000. But it's a different story if you've only got £2,000, or even £10,000. So some in the industry are concerned that smaller investors are being priced out of the market, creating an "advice gap".
One hope is that new innovations may be able to fill this gap. In the Financial Advice Market Review, published last year, the Financial Conduct Authority, the UK's financial services regulator, wrote that "new technologies can play a major role in driving down the costs of supplying advice and enabling firms to engage with consumers more effectively".
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Enter the "robo-advisers", also known as automated online portfolio managers. These provide managed portfolios for investors with limited or no input from human advisers and aim to make investing as simple as possible. Investors typically complete a short online questionnaire to determine their risk appetite and are allocated to one of a number of portfolios with different levels of risk and potential return. The platform's algorithms select the investments in each portfolio, monitoring and adjusting them in response to changing market conditions. Many build the portfolios using exchange-traded funds (ETFs), although some select individual securities.
Robo-advisers first appeared in the US in 2008, with the aim of "disrupting" traditional models of financial advice. There are around ten different companies in the UK. The oldest and best known is Nutmeg, which launched in 2012. It has a minimum investment of £500 and charges up to 0.45% for its "fixed allocation" portfolio of ETFs (largely automatic) and up to 0.75% for its "fully managed" portfolio (overseen by a human team). On amounts over £100,000 it charges 0.35% and 0.25% respectively.
Others include Scalable Capital, which charges 0.75%, and has a minimum investment of £5,000. MoneyFarm allows you to invest as little as £1, and charges nothing on amounts up to £10,000, 0.6% between 10,000 and £100,000 and 0.4% between 100,000 and £1m. Money on Toast is more of a hybrid service that targets investors with at least £50,000 and charges 1% per year.
Instead of being a fully automated system, clients can also pay £69 for an appointment for a "facetime" interview with a financial adviser. There are, of course, underlying fund costs to add to those charges. Nutmeg claims an average of around 0.19%.
There's a lot of enthusiasm about these kinds of innovations in the industry. "Robo-advisers will have a major share of the wealth market in the future," Kai Bald of Deutsche Asset Management tells the Financial Times. BlackRock, the world's largest fund house, bought robo-adviser FutureAdvisor in summer 2015. Yet it remains unclear whether enough people will embrace these services to allow them to make a profit while competing aggressively on fees. Nutmeg remains coy about the amount of assets it has under management, but reportedly only recently passed the £500m mark. The firm's pre-tax losses almost doubled to £9m in 2015. Betterment, the biggest US robo-adviser, has $5bn in assets but that's still tiny in the context of the global asset management business.
It's still cheaper to DIY
Robo-advisers are simple and much cheaper than having a financial adviser recommend a portfolio for you, but they're still not cheap compared with do-it-yourself investing through an online broker. With just a bit of effort you can set up your own portfolio and many providers will recommend model portfolios to suit your level of risk.
If you want to use traditional funds, Cavendish Online and Charles Stanley Direct charge 0.25% of your portfolio per year with no dealing charges. Investment trusts and exchange-traded funds (ETFs) will incur dealing charges on most platforms. AJ Bell Youinvest charges £9.95 per trade and Hargreaves Lansdown charges £11.95. But if you keep trading activity low, this shouldn't be too expensive.
Carney's concerns about robo-advice
While the FCA is happy to see robo-advisers grow to fill the "advice gap", Mark Carney, the governor of the Bank of England, expressed reservations about the rise of the robots when he spoke at a G20 conference in Germany last month.
The Financial Stability Board an international body that monitors the global finance system and which Carney chairs is "assessing how fintech developments are affecting the resilience of the system". These innovations "could reduce systemic risks by delivering a more diverse and resilient system". However, some developments "could generate systemic risks through increased interconnectedness and complexity, greater herding and liquidity risks."
Carney specifically pointed to concerns about robo-advisers."Robo-advice and risk management algorithms may lead to excess volatility or increase pro-cyclicality as a result of herding, particularly if the underlying algorithms are overly sensitive to price movements or highly correlated."
That hasn't gone down well with the industry. Adam French, chief executive of Scalable Capital, called Carney's comments misinformed. "The real systemic threat" is traditional equity and bond portfolios that "channel many clients into exactly the same positions," he said.
Ben studied modern languages at London University's Queen Mary College. After dabbling unhappily in local government finance for a while, he went to work for The Scotsman newspaper in Edinburgh. The launch of the paper's website, scotsman.com, in the early years of the dotcom craze, saw Ben move online to manage the Business and Motors channels before becoming deputy editor with responsibility for all aspects of online production for The Scotsman, Scotland on Sunday and the Edinburgh Evening News websites, along with the papers' Edinburgh Festivals website.
Ben joined MoneyWeek as website editor in 2008, just as the Great Financial Crisis was brewing. He has written extensively for the website and magazine, with a particular emphasis on alternative finance and fintech, including blockchain and bitcoin. As an early adopter of bitcoin, Ben bought when the price was under $200, but went on to spend it all on foolish fripperies.
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