What is a robo-adviser and which is the best one for me?

The two main routes of investing are traditionally using a financial adviser or doing it yourself but digital wealth managers – or robo-advisers – have become a popular option.

Digital wealth managers provide a middle ground between paying for and trusting a financial adviser with your money or the DIY approach.

Rather than choosing your own funds and keeping an eye on your portfolio, a robo-adviser is an automated online investment platform that tailors a portfolio to reflect your goals and risk appetite.

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Most will ask you to complete a short online questionnaire to determine your attitude to risk.

You may also be asked how much you are willing to invest and your investment target and timeframe.

The platform will then allocate you one of a number of portfolios with differing levels of risk and potential return.

Its algorithms select the investments in each portfolio, monitoring and adjusting them in response to changing market conditions.

Users then typically pay an annual platform fee and for underlying fund charges.

Most build the portfolios using exchange-traded funds (ETFs), although some select individual securities.

Using ETFs helps keep the cost of investing down, so using a robo-platform can also be cheaper than a financial adviser and some DIY platforms depending which one you use and the investments you make.

Be aware, though, while robo-advisers may have very clever algorithms, they are not infallible and, as with all investments, returns are not guaranteed.

The best robo-advisers 

Nutmeg

Nutmeg is one of the oldest robo-advisers in the UK, founded in 2011, and has won a number of awards over the years. Its fees depend on the investing style you select.

Its fixed allocation product has a fee of 0.45% up to £100,000 and then 0.25% beyond, rising to 0.75% on the first £100,000 in its socially responsible, smart alpha and fully managed products and then 0.35%.

This is before fund costs, which start from 0.20% for its fixed allocation and fully managed portfolios.

It has ten portfolios each in the fully managed and socially responsible categories and five smart alpha or fixed allocation portfolios, which Nutmeg defines as “globally diversified portfolios of ETFs designed to align with your risk preference and goals”.

The minimum investment is £500 for its ISA, general investment and pension products or just £100 for its Lifetime ISA and Junior ISA.

Moneyfarm

Moneyfarm was founded in 2012 with the mission of making investing more simple.

There are fourteen globally diversified risk-rated portfolios on offer for investors to choose from, seven full managed classic portfolios and seven fully managed sustainable portfolios. Moneyfarm is actively managed and requires a minimum investment of £500. It has a tiered fee model structure, which means you pay lower fees the more you invest. Moneyfarm charges fees on a sliding scale from 0.75% on accounts with capital up to £10,000 to 0.35% for accounts of more than £500,000. There is a cheaper fixed allocation version where your portfolio isn’t actively managed but is just rebalanced once a year. The pricing is also tiered and goes from 0.45% between £500 and £100,000 to 0.25% on more than £500,000. Its average fund fee is 0.20%.

InvestEngine

InvestEngine provides three main ways to invest depending on your risk appetite. Novice investors can choose a managed portfolio which involves InvestEngine making day to day decisions for a fee of 0.25%. There is no fee for investors who choose to build the portfolios themselves. This makes InvestEngine one of the cheapest robo advisers on the market.

InvestEngine requires a minimum investment of £100 to create a portfolio. There is also a DIY option or ready made LifePlans, which are ready made portfolios where users choose the equity exposure level from 20%, 40%, 60%, 80%, or 100%.

Chip

Chip, well known for top savings rates, has investment portfolios managed by asset management giant BlackRock. It lets you choose from three funds: Adventurous, Cautious and Balanced.

Its basic account has an annual fee of 0.25% on invested money (you can also hold cash) and its “Chip X” plan which gives access to the full range of investments (and is necessary if you want to open a stocks and shares ISA) and costs £5.99 a month or £65.05 annually. This means you don’t pay any platform charges but fund fees still apply. A minimum deposit of £1 is required.

Wealthify

Wealthify allows you to invest in three main plans: general investment account, Wealthify Stocks and Shares investment ISA, a Wealthify Pension and Wealthify Junior Stocks and Shares ISA. The options are all also available as ethical plans if you choose to invest ethically.

Wealthify charges a flat fee of 0.6% irrespective of whether you are investing £1,000 or £100,000 plus around 0.16% in investment charges. So it is a good option if you have a smaller amount to invest, especially as Wealthify requires a minimum investment of £1.

The benefits of using robo-advisers

Low cost: This is one of the biggest reasons why people opt for using a robo-adviser compared to a traditional discretionary wealth manager. ETFs tend to be cheaper than active funds that financial advisers may opt for.

Advisers charge an average of 2.4% for initial advice and 0.8% for ongoing monitoring and support, according to the Financial Conduct Authority.

That can save you money on a large investment portfolio each year, particularly over the long-term. For example, the annual fee on a £100,000 portfolio would be £800 when using the average advice figures but that would be almost halved to £450 when paying 0.45% with a robo-adviser. Additionally, the average advised customer has more than £150,000 of assets under advice, according to the FCA whereas you can start with as little as £1 on a robo platform.

Greater variety: Robo-advisers’ offerings are often considered to be more diverse as they tend to invest in ETFs covering a broad range of asset classes including stocks and bonds, with the exact allocation depending on your risk appetite. You may be able to invest in ETFs on a DIY platform but the range could be more limited.

The risk of using robo-advisers

A lack of individualisation: While prospective customers fill in a questionnaire to ascertain their investment preferences, customers can still be placed in a very broad category.

Not good for short-term investments or trading: Robo-advisers are better suited for longer-term investments. While portfolios run by robo-advisers are usually considered to be quite diverse, they aren’t immune from usual fluctuations that can occur in any portfolio and are more suited to those investors who have longer investing time horizons.

No ongoing support: A financial adviser can build a plan that fits in with your whole lifestyle and other expenses and can track how close you are to your target based on all your income and expenses. A robo-adviser may only provide an idea of how your portfolio on its platform is performing and it can be hard to get context of how this fits into your wider plan. Plus, you can’t ring a robot if you are worried about the markets and the impact on your portfolio whereas an adviser could provide reassurances and stop you taking too much money out and even putting too much in.