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

Traditionally, there are two routes to investing – you can approach a financial adviser for help, or you can handle everything yourself. 

Financial advisers charge an up-front fee, which is fine if you have a decent amount of money. If you’re investing £100,000, paying a fee of £500 or £1,000 might not sound much. But it's a different story if you've only got £2,000, or even £10,000 to put in. 

More confident investors can go the DIY route. Open an online account with a broker (see here for a list of online Isa and Sipp brokers) and select the funds and stocks you want in your portfolio. It’s much cheaper and you have ultimate control over your investments. But it does take some work and you do need  some knowledge and confidence.

In recent years, however, a third way has appeared: automated investment platforms, also known as digital wealth managers, or “robo-advisers”, which are a lot cheaper than having a financial adviser manage a portfolio for you, though not as cheap as do-it-yourself investing through an online broker. 

A robo-adviser is an automated online investment platform that can tailor a portfolio to suit you and the level of risk you are comfortable with. Most will ask you to complete a short online questionnaire to determine your risk appetite, and will then allocate you one of a number of portfolios with differing 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. 

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

Be aware, though, that while robo-advisers may have very clever algorithms, they are not infallible and investment returns are not guaranteed. As with all investing, the value of any investment can go down as well as up and you may end up with less money than you started with.

The pros and cons of robo-advisers

Pros

Low cost. This is one of the biggest reasons why people opt for using a robo adviser compared to a traditional discretionary wealth manager. 

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. 

Cons

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. 

Some of 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. It has a fee of 0.45%, or 0.75% for a fully managed portfolio. It has ten fully managed portfolios, five fixed allocation portfolios and five smart alpha portfolios, which Nutmeg defines as “globally diversified portfolios of ETFs designed to align with your risk preference and goals”. 

Accounts with a balance below £500, require a monthly contribution of £100, so this account may not be the best if you hold a very small balance in your account. 

Moneyfarm

Moneyfarm was founded in 2012 with the mission of making investing more simple. It has more than £2.4bn assets under management as of 1 June and has won several industry awards. 

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.

InvestEngine

InvestEngine has ten growth portfolios and three income portfolios, investing in a choice of 500 ETFs. It provides two 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. 

Chip 

Chip  has launched investment portfolios, managed by asset management giant BlackRock. It allows you to choose from three funds: Adventurous, Cautious and Balanced. Its basic account has an annual fee of 0.5% 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 £3 a month and 0.25% on invested money. A minimum deposit of £1 is required. 

Wealthify

Wealthify allows you to invest in these 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. Wealthify requires a minimum investment of £1.