You may not have heard the term ‘robo-advice’ but you may have noticed the growth in the number of financial firms using websites and digital platforms that help you work out how to invest or save for your retirement. But what is robo-advice?
What is robo-advice?
Robo-advice seems to mean different things to different people. It can mean:
- An investment firm using algorithms to help you to work out which of its funds to invest in, based on answers you give about what you’re investing for and your attitude to risk. Money On Toast is an example of this. Wealth Horizon offers a similar service.
SAVVY TIP: With services like this, you can often only invest in the funds offered by that specific company (or the parent company it’s owned by).
- A pensions company offering fixed fee advice on what to do with your pension when you retire. LV= Retirement Wizard is an example of this.
SAVVY TIP: Here you may have the option of investing your pension money with the firm giving you the advice or with a different pensions provider entirely.
- A firm of financial advisers offering online financial advice about a wide range of financial issues for a fixed fee. You submit the information online, but the advice is given by human advisers. Saidso is one company offering online fixed fee advice by financial advisers.
Are you getting advice?
In financial terms, the word ‘financial advice’ mean something very specific. It means that a financial professional who is regulated by the Financial Conduct Authority is giving you individual advice about what to do about your own financial situation. Most robo-advisers provide regulated advice. This means that if, for example, you invest some money on the basis of what you’ve been advised to do and it turns out to be far too risky for you, you may be able to complain about the advice you were given to the Financial Ombudsman Service.
SAVVY TIP: Financial advice can include, but is not limited to, advice on where to invest your money and what to do with your pension as you approach retirement. It should take into account your own financial situation, including how much risk you are willing to take, how long you can invest for. It should also establish how much you have by way of savings and may ask about your tax circumstances.
Robo-advice may be a misleading term because in some cases you are not being given fully regulated advice – it may be more like guidance to help you decide what to invest in. This should be made very clear by the website before you use its services. For example, Nutmeg doesn’t offer advice, but builds a portfolio from investments it offers that it believes are suitable for you.
Restricted advice or independent advice?
Advice offered by a robo-adviser is not necessarily the same as going to see an independent financial adviser (IFA). Under the regulations, an IFA has to offer you advice about a wide range of financial issues and offer you products from the whole marketplace.
SAVVY TIP: Robo-advisers are generally what’s called ‘restricted’. This may mean that they only offer advice on a limited range of financial areas (such as investment planning or what to do with your pension) or they may only offer products from their parent company. It’s important that you understand what the limitations are.
How much will it cost?
Although robo-advice is generally much cheaper in terms of the upfront cost than going to a human financial adviser, it’s important to find out how much you may have to pay on an ongoing basis if you decide to invest money through the advice platform.
SAVVY TIP: This fee is normally a percentage of the amount of money you invest and, once you’ve added in the investment fund management fees and other costs, it may be more than you think.
What to ask
Robo-advice is still in its early stages in the UK. That, combined with the fact that many people find all the rules and terminology around financial advice to be rather baffling, means it’s important that you ask some questions about what you’re being offered. Here are the questions I’d ask before investing through a robo-adviser.
- Are you offering financial advice as regulated by the Financial Conduct Authority (FCA) or are you offering guidance or helping me to select my own products? If you’re not getting advice that’s regulated then you can’t complain about what you’ve been advised to invest in or buy if the products turn out to be unsuitable for your stated needs.
- Will my money be invested in funds or products offered by you or your parent company?
- Will my money be invested in ‘active’ or ‘passive’ funds? Active funds are those that are actively managed by a fund manager or team of managers, whereas passive funds track a particular stock market index, such as the FTSE 100 or FTSE All-Share index.
SAVVY TIP: Passive funds tend to be cheaper and many argue that they perform as well as active funds (some say much better). However they don’t screen your investments at all so you may find your money is largely invested in banks and oil companies, which may not appeal.
- Who owns you and what is your relationship with them?
- What will I pay for the advice and what are the charges that I will pay through the investments or pensions I invest in?
- Is the advice offered by human financial advisers or is it based on an algorithm? There’s no right or wrong answer – it’s more about your personal preference.
- Do you review my investments if my circumstances change or on an ongoing basis or is it up to me to do that? If so, what do you charge for this?
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