Should you use a robo-advisor?

Reader's Digest Editors 9 July 2018

The technological revolution hasn’t just changed the face of the way we manage our investments

 It has also led to dramatic innovations in the tools available that help form our decision making processes. A robo-advisor might sound like something straight out of science fiction, but advances in machine learning mean that AI can advise us just as well as a human financial advisor.

Or can it? A recent review by the FCA cast severe doubt upon the quality of financial advice being offered by the growing number of robo-advisor tools that are available online. So what are robo-advisors, and should you consider using one to help manage your investment portfolio?


The rise of the machines

Financial advisors have been using online tools to manage portfolio allocation for years, and robo-advisors are simply an enhancement on this basic precept. They look at the investor’s profile and risk appetite, scour the stock trading market options and manage the investor’s money according to exactly the same principles that a human advisor would employ. 

The difference is that instead of the fees a financial advisor charges, which are typically around the £150 per hour mark, the robo-advisor will charge a flat rate of somewhere between 0.2 and 0.5 percent of the portfolio value per year. If you are looking to invest, say, £70,000, it is clearly a compelling option. 

Why is the FCA worried?

The problem with the robo-advisors is that they pay very little attention to the investor’s knowledge or experience. Yet it is those relatively small-scale investors who have the lower sums to invest that will be most drawn to the robo-advisor option.

This bracket contains the retirees wondering how best to manage their pension pots for a comfortable retirement, or the newlyweds looking to balance the remains of their student debt against investments and the desire to start a family. These are exactly the people who need the personal touch of a human advisor, yet will be drawn to the AI alternative as a way to reduce costs. 

An experienced investor, who has a seven-figure portfolio will have far more knowledge and experience of the investment market, and could probably manage well with a robo-advisor. Yet the irony is that this is the person who is least likely to use one, and will probably continue to retain the services of the human advisor.


Is a robo-advisor for you?

If you have straightforward investment needs, you understand the markets and you simply need an online tool that will allocate your funds and manage your investments according to your predetermined strategy, then a robo-advisor is the perfect solution to help you generate passive income.

The danger is to place too much reliance on the “advisor” side. If you are not sure what to do, the point you need to remember is that the advice the AI gives you is only as good as the information you provide. Ultimately, the financial advisors of this world do not need to worry about becoming obsolete, because there will always be a place for human interaction and advice.