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Nov 28

Are robo-advisors a good way to invest?

Reading Time: 4 mins

Are you looking to invest but keen for a helping hand? Shelling out for the services of a professional is no longer your only option.

Thanks to the advent of ‘robo-advisors’ it’s now possible to have a digital companion pick and choose investments for you based on your appetite for risk.

Automatic investing tools have soared in popularity over recent years, but are they any good, and what are the potential drawbacks?

Keep on reading for all the details or click on a link to head straight to a section…

What are robo-advisors?

Robo-advisors are app-based investing tools that use clever algorithms to pick and choose investments on your behalf.

While robo-advisors may seem like a totally new way to invest, you can consider them a middle ground between having an actively managed portfolio and picking your own stocks and shares. 

Interestingly, but perhaps not surprisingly, robo-advisors are particularly popular among millennial investors. A recent report has suggested millennials are TWICE as likely as older investors to consider relying on automatic investing tools.

SIGNING UP FOR A Robo-advisor ACCOUNT

Getting started with robo investing is often a straightforward process.

Once you’ve downloaded a robo-advisor app of your choice, you’ll usually be able to deposit funds as soon as you’ve:

  • Set up a password. Many apps will support biometric log-in.
  • Proved your identity. Usually achieved by uploading a digital copy of your ID.
  • Decided on the type of investing account to open. A stocks and shares ISA may be suitable if you’re looking to invest tax-free.

When you’ve completed these steps, you’ll then need to answer a few questions to determine your appetite for risk. You can expect to answer questions about your investing goals, and how long you plan to invest for.

Based on your responses, your robotic companion will then put together a portfolio for you. Don’t worry if you aren’t too happy with any suggested investments. You’ll be able to manually override them if you wish. You’ll also be able to increase your risk level in future.

Once you’re happy with your portfolio, your robo-advisor will go ahead and purchase stocks, shares, and/or bonds on your behalf.

RE-BALANCING your portfolio

A robo-advisor that automatically re-balances your portfolio can be extremely useful.

To understand why, let’s say your portfolio consists of 60% equities and 40% bonds…

With such a holding, if equities rise and bonds prices fall, you’ll likely end up with a greater portion of equities in your portfolio. This may end up skewing your exposure to risk, especially if a low tolerance for volatility led to you holding a high proportion of bonds in the first place.

The automatic re-balancing of your portfolio is therefore really important if you’re keen to keep your risk exposure in check.

The pros and cons of robo-advisors

Now we’ve explained what robo-advisors are, let’s take a look at the potential benefits and drawbacks of using automatic investing tools.

Pros of using a robo-advisor

1. Transparent fees. Management fees, platform fees, share dealing fees… working out the total costs involved of investing through a normal stocks and shares account can be rather confusing to say the least!

With robo-advisors, transparent fees are typically the norm. Total fees are almost always displayed clearly, so you can easily work out costs and avoid any nasty surprises.

2. Simple and straightforward to use. While bright colours and snazzy features often go hand-in-hand with robo-advisors, it’s fair to say that the majority are easy to use too.

We shouldn’t forget that robo-advisors are often targeted towards newbie investors, so providers are understandably keen to make everything simple and straightforward as a result. So, if you’re confused about investing jargon, or you want to invest with minimum hassle, a robo-advisor could be for you!

3. It’s cheaper than having a managed portfolio. If you want a human to manage your portfolio there’s no escaping the fact that it’ll cost you a fair whack.

Robo-advisors can be a LOT cheaper than their human equivalents. And given AI technology has come a very long way in a short space of time, some may suggest robo-advisors can be just as effective!

Cons of using a robo-advisor

1. Fees aren’t the cheapest. While automatic investing tools can have transparent fees, they’re rarely the cheapest way to invest. For example, if you’re happy to buy an index-tracker fund, then you may find traditional platforms cheaper.

2. Lack of flexibility. It almost goes without saying, but if you want the full flexibility to pick and choose your own investments then a robo-advisor probably isn’t for you.

You should instead look towards opening a normal stocks and shares ISA or general investing account.

3. You may be tempted to check your portfolio too often. It’s no secret that if you invest with a long-term mindset, you’ll be less likely to panic sell if the stock market takes a turn for the worse.

However, because robo-advisors make it easy to keep an eye on your investments, you may be tempted to check the performance of your portfolio on a regular basis. There’s nothing inherently wrong with this. However, having easy access to your portfolio may tempt you into making knee-jerk decisions.

When it comes to investing, its best to make decisions with your head and not your heart!

What robo-advisors are available?

Many investing platforms now offer automatic investing options. In fact, the current market is so competitive that some providers frequently offer cashback deals to attract new customers.

Big-name platforms offering robo features include:

Before you invest, always do your own research. As is the case with any type of investing, your capital is at risk. If you aren’t sure about a particular platform, some robo-advisor accounts will allow you to play with a risk-free virtual portfolio. This will allow you to try out features without having to put your own money on the line.

Interested in learning more about investing? Sign up for our fortnightly MoneyMagpie Investing Newsletter. It’s free and if you find it’s not for you, you can unsubscribe at any time.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. Capital at risk.

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