What Is a Robo Adviser? Is One Right for Me?
If you're looking for low-cost guidance and management of your investments, a robo-adviser might be an option to consider.
What is a robo-adviser?
A robo-adviser is an automated online service tasked with helping people to meet their financial goals. You simply create an account, fill out a questionnaire and then, based on your answers, are offered suggestions of ready-made portfolios to invest in.
» MORE: How to get started investing
How do robo-advisers work?
Like their human counterparts, robo-advisers start by asking a handful of questions. You’ll probably be quizzed about your age, earnings, savings, financial commitments, why you want to invest and how much risk you’re willing to take on.
These queries are concerned with gauging three important things:
- Your goals.
- Your tolerance for risk.
- Your time horizon. (That is, the amount of time you have before you will need the money.)
After the system gets your answers, it should have a basic idea of whether you’re a cautious investor best suited to cash-like investments, an aggressive investor keen to pursue the higher returns and associated risks of shares and high-yield bonds, or something in between.
If you are happy with its suggestions, the robo-adviser will invest your money, usually in a low-cost basket of exchange-traded funds (ETFs) or passive trackers. It will manage your portfolio on an ongoing basis and send you regular reports until you tell it to stop or change your requirements.
» MORE: Investment funds explained
Pros and cons of robo-advisers
A robo-adviser is a lot cheaper than traditional human advice. You could pay as little as £25 for initial guidance on where to invest £10,000, whereas for the same service a financial adviser might charge between £100 and £300.
Robo-advisers also can supervise your investments. Computer algorithms are not perfect, but there’s an argument that their cold, logical approach is more effective than the emotional decision-making trap that many human investors fall into. (Robo-advisers are regulated by the Financial Conduct Authority (FCA) up to £85,000. So if something goes wrong you can complain to the Financial Ombudsman Service (FOS) and potentially get your money back.)
Of course, entrusting your savings to a machine isn’t without drawbacks. Usually you’ll have no one to call for guidance during a scary market meltdown. And you'll have to be content with being lumped into a category and assigned a risk preference, a subjective measure open to interpretation, based on just a few general questions.
Investment choices can be scant as well, which could mean missing out on the best options. And if you have just a small amount to invest you may find that their fees eat too much into returns, particularly if you choose one that charges a minimum monthly fee.
How to choose a robo-adviser
Many robo-advisers use the same technology to pick and manage investments, so selecting which one is best for you generally comes down to the following:
- Regulated and financially secure. Check the FCA’s register to see if the robo-adviser is regulated, and be wary of smaller providers that could potentially go bust.
- Fees. Charges mainly consist of management and transaction costs and generally are applied as a fixed amount or a percentage of assets invested.
- Investment options. Choice varies, with some only offering products from certain providers.
- Services. Some offer extra perks, such as the ability to contact a human adviser.
- Minimum investment. Not all robo-advisers may be accessible to you. Minimum investments range from just £1 to £50,000.
- Glowing reviews. Read reviews to see whether the service is endorsed by its own users.
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in
Daniel is a freelance finance journalist. He has written and edited news, deeper analysis features, and opinion pieces for the Financial Times, Investopedia and the Investors Chronicle. Read more