Why choose a robo-adviser?

The traditional world of financial advice is being disrupted by technology. Now you are able to make your investment decisions online with the aid of the so-called robo-advice generated by computer software using mathematical rules or algorithms. Here we look at this new world of investing.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

Once upon a time, if you wanted financial advice, you had to find a financial adviser – usually a nice man in a suit, who would invite you to his office to talk about equities and bonds over a cup of tea. However, the global financial crisis and historically low interest rates have shaken trust in traditional advisors, and left many savers looking for an alternative.

Never slow to spot a gap in the market, the financial sector has come up with a very modern solution: robo-advice.

Using cutting-edge technology, robo-advisers perform more or less the same duties as human advisers, but with much lower fees. All you need to access them is a laptop, an internet connection, and money to invest.

What is a robo-adviser?

The name is a little misleading – we aren’t talking about robots in offices, dispensing financial advice, but there is an element of artificial intelligence to the process. At its core, a robo-adviser is an algorithm, or a piece of software coding, that has been specifically formulated to work out your investment needs.

Just like a financial adviser, robo-advisers begin by collecting a certain amount of information from you (eg your age, your assets, your targets and your savings) and they use this to create a risk profile. Every investor falls somewhere on the risk spectrum between the extremely conservative (investors who would rather earn consistently low returns over the long-term from traditional investments such as bonds and cash ISAs), to the very risk-aware (usually younger, wealthier investors who are out to double or triple their money in a short period of time, but can afford to potentially lose a big whack of their capital). Once your risk profile has been established, your robo-adviser will put together a diversified investment portfolio that suits your needs – just like a financial adviser.

However, unlike a financial adviser, robo-advisers do not have any overheads such as office rent, staff costs or professional fees, and this means that they can afford to keep costs at an absolute minimum. It also means that there are lower minimum investment levels, so novice investors can test the water with smaller amounts, and add more to the pot as they become more used to the service.

Why should you use a robo-adviser?

The low fees and growing availability of robo-advisers means that they are rapidly becoming more accessible than financial advisers ever were. Anyone can use robo-advice to manage their finances, whether that involves a £500 initial investment in a stocks and shares ISA, or a £100,000 Self Invested Personal Pension (SIPP).

And make no mistake, financial advice is expensive. Just last year, the Financial Conduct Authority (FCA) warned that 16 million UK consumers could be trapped in a ‘financial advice gap’ where they need professional investment advice but simply can’t afford it.

There is a widely-held misconception that only the very wealthy need to worry about financial planning. This is not true. Everyone should be saving towards a private pension, with no exceptions – whether you are putting away £10 a week or £1,000 a month. The state pension age is steadily rising, while changes to National Insurance Contributions (NICs) mean that tens of millions of people will be retiring much later than planned, and with much less than they expected. Furthermore, a series of recent reports have painted a worrying picture of private pension saving. There is a £310 billion shortfall in the UK’s pension savings, according to Aviva’s calculations, while Zurich Insurance recently found that 41% of women and 30% of men aged 25 to 39 have nothing saved in their pension fund.

According to a MetLife survey, 45% of retirement savers are so concerned about their dwindling returns that they feel forced to take on more risk - a decision which could have disastrous consequences in the absence of professional financial guidance.

For many people, robo-advice represents the much-needed answer to their investment needs, bringing professional advice to the people who need it the most.

What to know before you invest

When it comes to your life savings, it goes without saying that security is paramount. If you are trusting an unseen algorithm with your biggest financial decisions, you need to make sure that you can trust the source. This is why some people still prefer the face-to-face familiarity of a financial adviser, and balk at the idea of leaving their money in the hands of a ‘robot.’ However, more and more established investment houses and money platforms are now offering their own robo-advice services.

It is also important to know how much you can afford to invest. Most people are not saving enough money for their pensions, so the sooner you start investing, the better chance you will have of building up a sizable pension and savings pot. Robo-advisers will help you establish reasonable savings goals – stick with them and you may be able to avoid the looming pension gap, even if you aren’t a millionaire.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.