What is a robo-adviser and how do they work?

What is a robo-adviser?

A robo-adviser is an online investment platform that uses algorithms to manage your investments automatically. They might also give you financial guidance, although some can offer full financial advice.

There's a financial advice gap in the UK, affecting as many as 12.4 million UK adults last year.

The advice gap refers to the problem facing people who could benefit from traditional financial advice but don't have enough investable assets to make it worthwhile. Boring Money says you need at least £200,000 to seek in-person financial advice.

A robo-adviser is a service that could help bridge this gap.

These services can bring portfolio management and advice to people who might not be able to access them via the traditional routes.

How do robo-advisers work?

When you sign up with a robo-adviser, you'll be asked to answer some questions to determine your understanding of investments and attitude to risk, as well as your financial goals.

The level of risk you take will depend partly on when you need your money back.

So, what are you investing for? Is it a long-term goal like retirement or something in the next few years like buying a house? You might be asked about your investment preferences, such as whether you are interested in socially responsible investing.

The algorithm will determine whether a 'cautious,' 'balanced' or 'adventurous' portfolio is the best option for you. Then you'll be presented with an investment plan it thinks best suits your needs and risk appetite from a range of five to 10 different portfolios.

Most robo-advisers use exchange-traded funds (ETFs) or index funds to keep costs down. 

You'll choose the type of 'wrapper' or account you want, such as a stocks and shares individual savings account (ISA), general investment account, pension or Junior ISA. When you've funded your portfolio as a lump sum or by setting up a regular payment, you are invested.

The robo-adviser monitors and regularly rebalances your portfolio automatically to make sure it stays in line with the agreed limits. You should be prepared to leave your portfolio alone and let it grow for at least a few years, the longer, the better.

You'll likely be asked to take a risk questionnaire at least once a year to check that your portfolio aligns with your requirements.

The pros and cons of robo-advisers

Advantages of robo-advisers:

• Robo-advisers are typically a cheap option as they use passive funds such as ETFs or index funds to keep costs down.

• They're accessible, easy to use, and there’s usually an app for more convenient access to your accounts.

• You don't have to worry about choosing your own funds or stocks, diversification, or keeping your investments at the right risk level; these services do it for you.

• A robo-adviser may offer a low minimum investment.

Disadvantages of robo-advisers:

• Despite the name, robo-advisers don't give comprehensive financial advice, including things such as tax and estate planning. They focus on investing your money for you. You may get financial guidance, but the decisions are on you.

• Unlike traditional financial advice, there may not be any human interaction (although not always, as Nutmeg, for example, does offer in-person financial advice). This might be more of a pro than a con for some people.

• There's limited opportunity to customise your portfolio - you'll get an off-the-shelf portfolio from a handful the robo-adviser has pre-built.

• There may be limitations that mean you can't meet specific investing preferences, such as avoiding certain sectors, delivering a certain income level, or having investments that meet environmental, social and governance (ESG) factors.

• The advice is usually restricted, meaning the robo-adviser only recommends investments from a small pool of options or its own funds (if applicable), not across the whole market.

• It can be hard to compare the true costs as few platforms disclose an all-in fee.

How are robo-advisers regulated?

The UK’s financial watchdog, the Financial Conduct Authority (FCA), regulates robo-advisers like other investment companies.

The FCA has said it expects automated investment services to meet the same standards as traditional firms. It has given extra scrutiny to digital suitability questionnaires, cybersecurity, and the reliability of algorithms used.

Robo-advisers are included in the Financial Services Compensation Scheme (FSCS), which covers money you deposit with regulated firms up to £85,000 per person in the event the firm becomes insolvent.

However, it's important to note you are not covered if your investments don't perform as invested and you lose money.

How to choose a robo-adviser

It’s important to first consider your priorities - are you looking for low-fee investing, an easy-to-use website or app, or something else?

You might want the option to get customer service from a human, even if the actual investing is done by a robot. It’s also worth comparing fees and performance from robo-advisers you're interested in. 

There are some helpful guides and round-ups available with a quick online search. You can read reviews from real customers to learn which robo-advisers are user-friendly and look out for joining offers such as cashback when you transfer an investment.

What are the alternatives to robo-advisers?

If robo-investing isn't right for you, consider these alternative ways to manage your money:

Traditional financial advice

If you'd prefer to find a traditional financial adviser, we can help. 

Unbiased can quickly match you with a qualified financial adviser or you can search our directory by specialism or location here and find a financial adviser who's a good fit for you.

Budget financial advice

If you want to go the traditional advice route but don't have enough investable assets, there are other options.

Acknowledging the advice gap, some advice firms have launched their own services for the 'mass market', such as low fixed fee advice services instead of the usual 'percentage of assets' charging structure.

For instance, Bancroft Wealth delivers portfolio management services and ongoing advice for a flat fee of £500 a year (or £1,000 for more complex cases), keeping costs down by using video calls instead of in-person meetings.

Octopus Money offers financial coaching and digital advice with a plan costing £299 and ongoing advice fees frin 1.15% a year.

DIY investing

Even with limited investment knowledge, it's not hard to set up your own investment portfolio. You would need to sign up with an investment platform, pay in some money or set up a regular payment instruction, and then choose your funds.

This is where people can become overwhelmed with the choices and give up. When you're starting out, you could consider a global equity ETF or index fund (although it’s worth doing your research first). They are cheap and you will get instant exposure to the world's stock markets, with in-built diversification.

Free financial guidance

You can find free financial information online through the government-backed MoneyHelper.

You can speak to one of their experts via webchat, WhatsApp or phone to receive guidance, but they don't offer regulated financial advice.

Which are the best robo-advisers?

The best robo-adviser for you will depend on what you're looking for in an investing service, but there are some strong brands on the market now with competitive digital offerings.

• Nutmeg: Nutmeg is the UK's largest digital wealth manager and offers a variety of portfolios with different risk levels. Different options including socially responsible investing, thematic investing, smart alpha, fully managed portfolios or fixed allocation. The total cost of investing is 0.66% a year for a fixed allocation portfolio. You can take financial advice from a human for an extra fee.

• Wealthify: Wealthify provides a simple, low-cost solution for beginners with ethical investing options. As well as the usual investment ISA, general investment account and pension, Wealthify also offers an instant access savings account and a cash ISA. Fees can vary but the annual management fee starts from 0.6%, with fund and trading fees on top.

• Moneyfarm: Moneyfarm combines robo-advice with human financial guidance. Fees are up to 1.01% a year (for a £10,000 investment) but can be reduced to 0.35% as your wealth grows. ESG and thematic investing options are available.

• Moneybox: Moneybox offers a lifetime ISA and helps you track down old pensions. ESG investing options are available and you can start investing with just £1. More experienced investors can expand their portfolios. The platform fee is 0.45% a month, the monthly subscription fee is £1 and annual fund costs will also apply.

Get expert financial advice

If you’re looking for help investing, whether it’s your first time or you’re an experienced investor hoping to review and optimise your portfolio, Unbiased can help.

Unbiased can quickly match you with a qualified financial adviser who can help you find the right investment strategy for your unique circumstances and goals.