Robo-advisors in the UK: what are they and how do they work?
Robo-advisors remove the emotion out of investing, making every decision automated and with very little human intervention. Learn more about what robo-advisors are and how they work with us. Past performance is no guarantee of future results.
What is a robo-advisor?
A robo-advisor is an automated, digital investment guide that helps you reach your financial goals through providing you with an alternative to portfolio managers. They essentially perform the same function as a portfolio manager, but at a much lower cost and relatively faster speed.
The robo-advisor uses predictive algorithms to formulate a portfolio suitable to your risk preferences and financial goals, requiring minimal human intervention in the process. You’ll only provide the robo-advisor with information that’ll assist it in forming a financial plan, risk profile and investment preferences.
Like with our own Smart Portfolios, robo-advisors will invest in a selection of global stocks, ETFs, investment trusts. This gives you broad exposure and diversifies your holdings, making the position less risky.
What is portfolio management?
Portfolio management is an investment service where expert wealth managers assist you to get exposure in the market. This facility has traditionally been sought out by higher net worth individuals to get professionals with a track record to help them reach their financial goals.
A portfolio enables you to tailor your investment across different markets like shares, bonds and commodities in a way that meets your financial needs and risk tolerance. Additionally, since it comes with the assistance of an expert manager, who handles your investments on your behalf – there tends to be lower risk involved. However, this service comes at a cost, and often requires large sums to be invested.
With us, you’ll use Smart Portfolios to get exposure to a wide range of global markets, tailored to suit your financial needs and risk appetite. We offer a competitive management fee for our services, with a proven track record to help you reach you reach your financial goals.
How do robo-advisors work?
Robo-advisors function as a reflection of your investment goals and appetite for risk. You start by inputting your market preferences, risk parameters and short, medium or long-term investment plan.
The algorithm uses the information to invest in a collection of assets defined according to your specification and then continually monitors the performance of those assets. When necessary, they rebalance your portfolio to ensure that your risk tolerance is always met.
What is portfolio rebalancing?
Portfolio rebalancing is a process of adjusting the selection of assets you’re invested in to ensure that it remains on track to reach your short or long-term financial goals. With the market fluctuating all the time, the portfolio needs to be adjusted regularly to take advantage of new opportunities in order to strike a balance.
Let’s say the investment weighting is 60% allocated toward stocks, and the remaining 40% is assigned towards bonds. If the market is moving against your position, thereby causing an imbalance and affecting your return, this presents an opportunity to rebalance your portfolio.
In this case, you can take an opposite position if your research suggests that the stocks will continue to decline, or you could change the allocation by either investing more or less in either security.
When you have an investment portfolio with us, we’ll rebalance it and reinvest your dividends to ensure that you stay on track to realise your objectives. Note that we’ll rebalance your portfolio at no extra charge.
Advantages and disadvantages of using a robo-advisor
Pros of using a robo-advisor
- It's more cost-effective to use a robo-advisor than it is to get expertise from a portfolio manager
- Robo-advisors remove emotions from decision making
- You can get access to the market at all hours
- Pay low initial investment amount (ours, for example, is only £500)
- You can add funds of any amount at any time to boost your position
Cons of using a robo-advisor
- There are limited options you can invest in
- It costs slightly more than do-it-yourself (DIY) investing
- Limited personalisation of the algorithm once the data has been inputted
- There’s lack of face-to-face interaction due to the process being automated
How much do robo-advisors cost?
Compared to human portfolio managers, robo-advisors charge much lower fees. However, it’s important to remember that the funds they invest in on your behalf will have costs, too. A traditional advisor may charge 1 to 2% of assets under management (AUM), and then you’ll have ETF fees and costs on top of that to consider.
Here’s a breakdown of costs for our Smart Portfolios.
| Management fee | Average fund cost1 | Transaction costs2 | Total annual costs | |
|---|---|---|---|---|
| On the first £50,000 | 0.50% | 0.13% | 0.09% | 0.72% |
| Over £50,000 | Free | 0.13% | 0.09% | 0.22% |
Note that you can reduce the amount of fees incurred when using our Smart Portfolio while still retaining the full services from our wealth managers. If your investment is above the £50,000 threshold, you’ll be eligible to pay low annual management fee – capped at £250 a year.
What are Smart Portfolios?
Smart Portfolios are our managed investment portfolios, inclusive of access to expert wealth managers that assist you in reaching your expected financial objectives. Our managed portfolios comprise of the services of experts with a good track record, cutting-edge technology – all executed at comparatively low costs.
We’ve tailored solutions for five distinct risk profiles, ranging from conservative to aggressive portfolio investments. You’ll need to provide information about your desired goals, preferences, investment horizon to help us understand your risk profile and the best products suited for you.
How do IG Smart Portfolios invest?
We invest in accordance with our risk assessment, product offering and investment horizon to deliver expected returns. Our Smart Portfolios are made up of exchange traded funds (ETFs) with different asset classes, geographies, and sectors to ensure that the risk is spread.
Throughout your entire investment journey, you’ll be kept in the loop of the total costs of ownership – even before you invest, as part of our guarantee to full transparency. You’ll easily keep track of the performance of your portfolio using our award-winning platform.3
Our expert wealth managers monitor your investments and rebalance the portfolio, when necessary, to ensure you always have the right asset allocation for your risk profile.
Our five Smart Portfolios
- Conservative portfolio – a large percentage of the investment is allocated to lower-risk securities like bonds, fixed-income, and money market funds generally with a short-term horizon
- Moderate portfolio – characteristically for investors who seek to protect their savings and still maintain modest returns by staying ahead of inflation, with the allocation distributed between stocks and high-yield bonds
- Balanced portfolio – the allocation of securities is evenly spread out (50/50) to include stocks and alternative assets like gold to reduce potential volatility, typically suited for investors who want to make incremental gains over a long run
- Growth portfolio – investors with a high-risk tolerance that seek capital growth and are prepared for sizeable fluctuations in hopes of realising great returns
- Aggressive portfolio – the investment tends to prioritise stocks because of the volatility, tailored for individuals with a very high-risk tolerance that can afford to withstand fluctuations in their savings for an extended period and tend to get high rewards for assuming the risk
FAQs
Are robo-advisors good for beginners?
Robo-advisors might be good for beginners due to their simplicity. Oftentimes, all you need to do is indicate the level of risk you can tolerate and the amount of money you're able to invest. Once that is done, the algorithm will determine the investment vehicle that will help you reach your desired expectations – at the specified level of risk.
Note that despite its simplicity, you need to have adequate knowledge of the market, and the potential risks associated with investing. The alternative to robo-advisors is using a brokerage account, which tends to require some level of expertise about markets that a novice may lack.
Therefore, if you're just starting out, robo-advisors are the preferred option to manage a portfolio for you as they are more cost effective, simpler to grasp for beginners and require minimal to no sustained tracking of the portfolio from your part.
Does IG offer robo-advisors?
Yes, IG offers robo-advisors called Smart Portfolios. You’ll get financial planning services from an automated advisor that will manage your portfolio and assist you in reaching your financial objectives.
Are robo-advisors a good idea?
Robo-advisors are a good idea depending on the level of expertise, investment goals and risk tolerance you’re willing to bare. When you’re starting out, it’s beneficial to use the assistance of a robo-advisor in getting exposure to the best investment product, at the level of risk you can tolerate and to
reach the goals you want.
For seasoned investors that are risk-seeking, robo-advisors are useful for automating the responsibility of keeping track of your investment and rebalancing your portfolio to meet your intended goals with very little human intervention needed. Note that both these situations can relate to the novice
and experienced investor.
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1 Fund costs can vary over time as they are dependent on the funds used to construct the portfolio and the relative performance of each fund held within the portfolio.
2 Transaction costs occur when funds are bought and sold to rebalance your portfolio. Estimates for other providers are taken at the date stated.
Our annual estimate for IG Smart Portfolios is based on 100% portfolio turnover, which is rather higher than seen since our launch in February 2017.
3 Best trading platform as awarded at the ADVFN International Financial Awards and Professional Trader Awards 2022.
Best trading app as awarded at the ADVFN International Financial Awards 2022.
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