Logan’s Run, Blade Runner, The Terminator and other dystopian Hollywood films suggest that the rise of the machines is something that should be feared.
But in the world of finance, the robo-adviser is widely considered to be good news for those who have felt priced out of traditional investment advice – or who want to tap into new technology to invest.
A whole host of online investment firms have cropped up in recent years, offering to help you pick and manage a portfolio, meet your financial goals and make money – all for a ‘modest’ fee. And they have been become known as robo-advisers.
Not all robo-advisers allow you to hold money in a Sipp so check before you invest
Why is there a need for robo-advice?
To understand why this market is evolving so rapidly, it’s essential to take a look back. Under old financial rules it was commonplace for IFAs to win new business under the premise of giving ‘free’ advice.
In reality, it was never free. Advisers made money through commission paid to them by fund managers. Their costs were wrapped up within the fees you paid for the investment they sold – a system that was criticised for problems ranging from mis-selling, to conflicts of interest, or just plain old poor value service.
Sometimes that advice worked for the customer, sometimes it didn’t. One person it usually worked for was the adviser, however, who could earn a pretty penny from providers with every investment product sale.
City watchdog, the Financial Conduct Authority, under its previous guise as the Financial Services Authority, called time on this with the implementation of the Retail Distribution Review in 2012.
The initiative banned advisers from receiving commission payments for investment advice and improved professional standards by stipulating they hold a minimum set of qualifications.
Though well intended, it caused many advisers to exit the industry altogether, or make their service available only to those with large amounts to invest or sizeable net worth.
More modest investors and those not willing to hand over a big percentage of their investment in fees each year were left out in the cold.
Nowadays, ordinary savers with modest pots of money tend to use DIY websites which offer a relatively cheap way to purchase investment products – but that means taking responsibility for setting your own investment goals, working out your risk appetite and choosing your own investments – even if you buy ready-made portfolios.
There’s a clear gap in the middle and this is why there is such a buzz around robo-advisers.
Should you invest through a ‘robo’?
What are the benefits?
It’s quick and convenient. Robo-advice comes from companies operating online, most of which also have apps, so individuals can access investment opportunities wherever they are at any time of the day or night.
They are spared the time and hassle of having to find and visit a financial adviser, who will grill them on every aspect of their financial affairs to come up with a bespoke investment strategy as part of a detailed financial plan. And as mentioned above, it’s low-cost by comparison to traditional face-to-face advice and active investment management.
What are the risks?
It is important to note that not all propositions catergorised as a robo-adviser offer financial advice. Some are only have discretionary investment management permissions – meaning they buy and sell investments on behalf of the clients. They do not make personal recommendations. This means that the investment strategy might not be the most appropriate for your situation and you may be better off with another strategy.