Robo-advisors are investing platforms that offer automated financial planning using complex algorithms rather than a catered plan offered by a human.
Most robo-advisors ask about your financial situation, what your goals are, and your risk tolerance. Then it uses this information to invest.
The better advisor platforms have a mix of investment offerings. From a trading account to popular retirement or tax-deferment options. You’ll have a decent range of choices.
What investors are robo-advisors best suited to?
Most robo-advisor platforms cater to small investors. They also lean towards newer investors who have some capital to invest, but lack the time or experience to research every investment decision they make.
If you’re new to investing, or even if you’ve done it for awhile but haven’t made the best decisions and your portfolio has suffered as a result, you at least have the knowledge there are expert models being used to create the plans.
Could you beat the robo-advisor doing it yourself? Maybe.
If you aren’t sure you could always invest equal amounts into a robo portfolio and one run by yourself and see which yields the higher return. If you can’t beat the robo-advisor platform, then why not free up your time and let the robots do it?
That part is true whether you are a small investor or have a few hundred thousand pounds. If you are DIY’ing a £300,000 or more portfolio it doesn’t mean you’ll perform better.
Some platforms have products available for accounts worth six-figures or more.
This is also a growing trend. As these types of products become more popular across wealth levels, more resources pour in, and the models these companies use improve. Then it becomes a battle of whose robo-driven plans produce the best return and a race to improve their machine learning.
Many high-net worth users do the same as smaller investors: they split their money between their financial advisors and the robo so see which outperforms the other. Even if it’s close, there are situations where the robo-advisor may win out due to lower fees.
The real cost of robo-advisors
One compelling benefit of a robo-advisor is low management fees compared to using a human. That and a smaller required investment up front.
Normally you’ll find two sets of fees. First, is the management fees which are typically aanywhere between 0.25% to 0.5%. Second are the Fund Fees which can be anywhere between 0.05% and 0.65% of your annual investment.
Always calculate costs not only one your opening account size, but as it grows, to make sure fees won’t eat into your return in the future.
How to pick the best robo-advisor
All platforms rely on machine learning algorithms built on the best economic models of investing. Just as there are many ways human investors choose to interpret and act on that data there are varying models each robo-advisor uses.
The best approach will be to narrow down your choices based on what investment products you’ll want, and the fees associated with those products.
Once you have a few choices compare the historical and recent performance of the portfolios. The better platforms always publish their performance.
Among our top choices, both Moneyfarm and Nutmeg publish performance data that has outperformed their benchmarks in nearly all portfolios.
Another top choice, Wealthify, publishes some strong results but without offering a benchmark.
Start with these three but remember, even a “best” platform is only the best if it fits your needs. Consider what your needs are before comparing, and then rate their advantages from there.