How does investing with robo-advice work? | moneyfacts.co.uk

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Michelle Monck

Michelle Monck

Consumer Finance Expert
Published: 19/05/2021

At a glance

What is robo-advice?

Robo-advice is an investment service that uses technology instead of human experience to make decisions about the best investments to make. Robo advice services ask you a dozen or so questions to understand your risk appetite and investment requirements and then uses this to make investments on your behalf. The robo-advisor then manages these investments on your behalf.

How does a robo-advisor decide which investments to choose?

The robo-advisor asks you several questions and uses the answers to these to then select a series of investment funds. These usually look at your risk attitude, life stage, investment purpose (income or growth for example) and how long you intend to invest for. The answers to the questions dictate the selections the robo-advisor will make. Those that are happier to accept greater risk in return for potentially greater return will see their funds invested in more aggressive funds. Those looking to invest for longer periods of time could also tolerate more aggressive funds to ride out any peaks and troughs in performance. Those approaching retirement may have their money in a greater proportion of cash based or lower risk assets to help ensure the money is available.

Do I need a financial adviser when there is robo-advice available?

Robo-advice is not independent financial advice, and it is not tailored specifically to you. This is unlike speaking to an independent financial adviser who will personalise their advice specifically to you and consider the big picture.
Robo-advisers may also be tied to a specific set of investment funds with a choice of a handful, while the larger robo-advisers may have more, an independent financial adviser offers access to the whole market.
Whether you choose to use a robo-adviser or speak to an independent financial adviser both will need to make sure they complete a suitability assessment for you. This sets out that the recommendation or decision to trade is suitable for you. If this turns out to have been incorrect or bad advice, then you can complain and may even be able to claim compensation.

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Is robo-advice regulated?

Firms offering robo-advice must be regulated by the Financial Conduct Authority (FCA).

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Why use robo-advice?

Robo-advice services are easy to use and because the funds are selected for you, you do not need to be a financial expert to invest. They are also a low-cost way to start investing usually charging 1% or less of your fund value, whereas an adviser often costs hundreds or thousands of pounds. However, it is important that you still understand the risks to your money and monitor the performance of your robo-adviser.

Is an investment platform or fund supermarket an alternative?

An investment platform or fund supermarket offers a similar service as a robo-advisor, but you will have to select your own investment funds. It is important you understand the risks of losing your money and will need to carefully check the performance of your selected funds.
Read more about investment performance in our investment news.

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Pros and cons of robo-advisers

  • Low funds needed to start trading
  • Less expensive than a financial adviser
  • Easy for share dealing novices
  • Time-saving compared to self-management
  • Eliminates ‘emotional’ investment decisions

 

  • Costlier than DIY stocks and shares management
  • Can be a little inflexible in its investment choices
  • Cannot offer detailed financial advice

 

Pros and cons of managing your own investments

  • Cheapest method
  • High investment flexibility
  • Low initial investment cost
  • Total control over which stocks, shares and bonds you invest in

 

  • Requires experience and knowledge of share dealing
  • Not suitable for novices
  • Time intensive

 

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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