Do you like the sound of RoboCop helping you out with your money? Or maybe The Terminator? Or maybe that scary-ass woman from Ex Machina played by Alicia Vikander?
Errr, probably not. But if you’ve heard this term “robo advice” you probably have some very bizarre images swirling around in your head.
Little wonder. Robo advice is poorly understood, described very inaccurately by the media and doesn’t actually lend itself to pithy names.
I can’t hope to explain all the ins and outs of “robo advice” in this blog, but I can hopefully give you a little portal into a world where investing could be made way more accessible for young folks, but not without some risks to consider.
Let’s actually find a better, more appropriate term for this industry. Online investment managers. God that sounds boring and dry, but actually it’s pretty much bang-on for our purposes.
I’m not against OIMs per se – I’m all in favour of making investment more egalitarian and inclusive. But I certainly don’t subscribe to the school of thought that this is a silver bullet for young people’s long-term financial needs. As ever with the financial sector, a fair few investment managers seem content to push through and impose new models on consumers without checking if they understand how it all works.
That’s where this mini-guide comes in. It’s a starting point, not chapter and verse, but hopefully it should give you an idea of what online investment managers are trying to do – and whether they’re right for you. Let’s do a spot of myth-busting, combined with rigorous reality checks and a precis of your options.
“A long time ago in a galaxy far, far away, when financial advisers were the only game in town…”
An online investment manager (OIM) can superficially seem like a poor man’s financial adviser. Since “poor man” in this context usually means anyone with less than £20,000 to invest, I wouldn’t take offence at this description. You, me and pretty much everyone we know (apart from smug Mum and Dad perhaps, bah) are in the same boat. But this description is erroneous. OIMs don’t really offer “advice”. They give you access to some investment options, basically, but they can’t necessarily tell you whether your Nana’s cash gift falls foul of the taxman or not. So robo advice is a doubly misleading name on account of a) no robots being involved and b) these firms not actually offering “advice”.
If you can afford financial advice and have complex questions about inheritance, pensions and wills, then go for it. But chances are that you’re reading this article because you don’t have much to invest and you’re not even that sure about investing in the first place. You keep hearing that savings are losing value in real terms due to inflation (true). You keep hearing that investing has never been more attainable thanks to the internet (true). But that’s where the absolutes end. Beyond financial advice, you broadly have two options. You can:
- Invest directly in shares, funds, crowdfunding projects or even crpto-currency if you want to go full Nerdling. This is known as DIY investing and it is mostly done through “execution-only” brokers or funds supermarkets (at this point, your eyes are probably swivelling in opposite directions).
- Using an OIM that asks for your input – your goals, how much risk you’re comfortable taking, how long you’ve like to invest, yada yada – and they’ll use fancy algorithms to come up with a suitable portfolio.
So when you use an OIM, you’re not just buying a fund. You’re not even buying a “multi-asset” fund (i.e. one that invests all over the shop, not just in one area). Ostensibly these services are gathering together a range of funds that should meet your needs, and then monitoring them on your behalf. It’s true to say that (as with so many things) the internet has been a game-changer for the investment industry. It has made what was once a high-end service available only at private banks and snooty wealth managers available to just about anyone.
The IKEA school of investing
It’s certainly fair to say that DIY investing is daunting for the majority of people whose previous experience of online money activities extends to, er, checking their bank balance and maybe moving some savings around. I have to say that execution-only services have come on leaps and bounds in recent years, and it’s staggering just how much info and “guidance” (we can’t say advice, we can’t say advice) they offer to Average Joe and Josephine on investing issues. It is perfectly possible to look up companies and funds, get any info you like about them, pick those that seem promising to you, buy them, monitor them online and sell out when the investment has come good. Whether you’ve got the appetite, time and patience for this approach is a different matter. It’s a lonnnnnggggg game.
But while unit trusts or investment trusts are a pooled form of investment that can help you spread your risk, there aren’t any guarantees that you’ll make money or even keep your initial investment, and piling into the wrong investments at the wrong time for the wrong duration would be utterly disastrous for your finances.
You also have to understand your temperament and feelings about investing generally. Do you like control? Would you would rather be the one overseeing your investments, rather than an online investment manager? And with control comes responsibility. Have you got the time and inclination to understand the most advisable shares, funds or asset classes to target for your needs? Or are you certain that you will never want to engage with this area and are quite content to outsource?
You take on more risk, in many different respects, when you invest off your own back. You can take OIMs to task if they fail to meet certain criteria – failing to diversify the investments sufficiently, making too many changes to the portfolio, the final value of the portfolio being less than previously quoted. You can go to the Financial Ombudsman as a last resort. If the Ombudsman finds in your favour, you will be entitled to either compensation or to be returned to the financial position you would otherwise have been in – if the OIM had kept their side of the bargain. This is interesting because in many ways, you’re more protected against adverse outcomes than you would be investing on your own OR going to an adviser (*places tin hat on head in expectation of adviser trolls*)
On the other hand…
However, there are some downsides to ponder. A lot of these portfolios have been used to relatively calm waters in markets. Okay, Brexit and Donald Trump unsettled markets for a bit, but I don’t think anyone’s pretending that wobbles last year are equivalent to the crashes of 2000 or 2008. Yes, OIMs held fairly well in these conditions, but so did a few select fund managers (more than well!) and a little bit of research and canny market-watching could net you much bigger returns in the long run through well-chosen unit trusts or investment trusts. IMO.
And before the more knowledgeable among you scream “THE MAJORITY OF ACTIVE FUNDS UNDER-PERFORM!”, the answer is yes. Undeniably. And mirror funds which just stick closely to the index are an outrageous con trick. But some deliver the goods. And at least we know the record of most active funds, as well as the past performance of all shares, bonds etc…it’s a matter of public and historical record. OIMs and their specific approaches are still new and haven’t established a track record. I’m not saying they don’t deserve a chance but a fair comparison will only be possible many years down the line.
It is also the case that you’ll probably pay more if you invest less. Most OIMs are arguably catering much more to 40 somethings caught just outside the traditional financial advice market, and while the fees are transparent and fairly easy to grasp, they (generally) favour those who bigger amounts to invest. That’s not to say that you’ll get some magic bargain deal by investing yourself, but you can shop around (using excellent info from the likes of platform consultancy lang cat) and see in black and white just how much each platform can charge for the amounts you’re investing and the number of times you’re wishing to trade.
There are also questions around the future viability of OIMs. They insist they don’t need more than £1bn in assets under management to smash their profitability out of the park as tech allows them to break even at much lower thresholds than traditional players. But quite a few people got a shock when Nutmeg (a major millennial-friendly OIM) announced pretty dire financial results recently. I wouldn’t worry about your assets being unsafe in the event of a firm crashing, but some of these cases show the industry is maybe more fragile than its surface bluster would suggest.
Nonetheless, OIMs aren’t going anywhere anytime soon. Whether they’re right for you will depend on your personality, how much you’re investing, what it’s for and how much responsibility you’re prepared to take for your investment decisions. I’m not a financial adviser, so I can’t tell you anymore than that, but get in touch if you have any questions about OIMs and I’ll try to get some answers for you – I may even do specific guides on specific OIMs if there is an appetite for it. DON’T SAY I NEVER SPOIL YOU.