How to choose a robo-adviser

Many of us haven't got the time, knowledge or the disposition to pick great funds on a regular basis. Often, the solution is to look for a solid all-round fund, but many investors want something more. Actively managed funds can cost a fair bit in fees and they aren't guaranteed to beat the market, so low charges are a priority. Many also want easy access via apps, and better, more transparent reporting of returns. If so, I'd suggest the answer is to look at the fast-growing "robo-advice" sector.

This technological disruption is driving down costs, improving transparency and might even encourage us to invest a little more. It started with clever start ups for example, Nutmeg in the UK but it is now spreading into the mainstream. In the US, outfits such as Charles Schwab (a huge stockbroker platform) and Vanguard (a fund management group) are building a massive market position.

In the UK, IG has hit the ground running first with its IG Smart Portfolios product. It isn't a pure robo-advice start-up the service is built from its existing IG stockbroking business but it looks a lot like the other robo services. The crucial part the asset-allocation decisions is being run in collaboration with BlackRock iShares, the world's leading ETF firm, which also has huge expertise in constructing portfolios. This is a powerful product and other robo-advisers will be watching keenly.

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Picking a good platform

A good robo-advice platform has some key characteristics. The investment account is managed and accessed online. It usually involves software which gauges your "risk appetite" on a scale between defensive (low risk) to adventurous (high risk). This results in a model portfolio being chosen for you and built using funds that the platform invests in on your behalf. Most platforms use passive funds usually exchange-traded funds (ETFs) which are fairly cheap when compared to actively managed funds.

Once you've been allocated a core portfolio, there might be some top-level overlay applied: ie, the service might make some tweaks based on market conditions. You can usually contribute a fairly small amount of money, from £1 or £100 per month, and build your savings up over time. Checking on the portfolio is incredibly easy and real-time with graphs and tools that are usually very impressive on most services (most offer access via apps).

Ease of use will be a key factor for most people in choosing a provider, but you also need to consider costs. You should never have to pay more than 1% for the platform, and I'd suggest that the sector will settle at between 0.4% and 0.6%. Also take into account the annual total expense ratio of the ETFs in the portfolios. This would usually add around 20 to 30 basis points, taking the total cost closer to 1%.

Finally, there's the tricky matter of returns. You might have the cheapest platform and the best apps, but it will all be let down if the returns are rubbish. Asset allocation matters. Many platforms say that they don't tweak much, but stick to long-term allocations. But what happens if those fixed allocations blow up in a market crash? Is providing a tech platform really worth charging 0.5% a year? I suspect that good asset allocation knowledge and risk management will be a key selling point, as it is already with Nutmeg and Scaleable Capital.

Measuring performance is still hard, not least because the providers are so young that meaningful data is scarce. We need proper benchmarking for the sector. So I'm going to start investing my own money in as many of the platforms as I can. I'll report back on my adventures in robo-investing wonderland in due course.