I'm a professional working in the city and I have £30,000 in savings that I wish to invest. I don't have time to manage a portfolio myself and I want it as easy and smooth as possible. I also want it to be low-cost so I figured exchange traded funds are the way to go.
I've researched robo-advisers as I think they could be a nice fit for my situation. I went to an investment seminar of Scalable Capital earlier this month and I thought they had an interesting approach to risk management and their founding team seem to know what they're up to.
But they're relatively new so I was wondering, should I invest my money with them?
Liza, 30, London
Risk appetite: High - I do not have family or children, nor mortgage. I however do realise that I need to build a sufficient pot for pension as I do not believe the Government schemes will exist in the future.
Investment time horizon: Starting this year - mid/term-long/term investment
Holly says: You have no dependants with short-term requirements and a decent chunk of savings which makes the stock market a logical place for your longer-term savings.
I’d usually suggest that people consider the stock market if they have at least three months’ salary in easy access cash to cover emergencies and they can afford to set aside the money for five years or more.
Robo-advisers are still relatively new in the UK and manage about £1.1billion of our money today.
The basic idea is that you complete a straightforward questionnaire online and then they match you to a ready-made investment portfolio which suits your time frames and level of comfort with risk and volatility.
The vast majority of robos use low-cost, ‘passive’ investments to build the portfolios. Expect to pay about 0.75 per cent to 1 per cent all-in per annum.
Why you should consider robots
One of the key disciplines that the robots impose on us is diversification. An important way of minimising risk by spreading our bets around. We all tend to show what we call domestic bias and load up our portfolios with familiar brand names and shares.
Most Britons will hold more UK shares than a brand-agnostic computer-driven formula looking for global opportunities would pick. Robo-advisers will take our money and spread it across the globe, into a wide variety of investment types.
The chart here show a Scalable Capital portfolio on 8th June. On this date, 19 per cent of the equities in the portfolio were in emerging markets, 16 per cent in Europe and 14 per cent in the US.
You effectively outsource the whole decision-making process and management process to an unemotional machine which will be much calmer and more responsive to markets than most of us.
Not all robo-advisers are the same (or offer advice)
Our choices are increasing as this market grows. Nutmeg is the largest robo in the UK with a market share of over 80 per cent today. Emerging rivals include MoneyFarm, Scalable Capital and Wealthify. They are not all a carbon copy of each other.
Some robo advisers – such as Nutmeg or MoneyFarm - fall under the simplified advice banner meaning they can recommend a product for you in the area you're talking to them about, but not your whole financial position.
These robos will typically ask prospective clients cursory questions during the suitability process to gauge whether prospective customers can afford to invest but, crucially, they do not take a comprehensive view of their financial position.
If you require investment advice that digs deep into your financial circumstances, full-fat financial advice offered by a flesh and blood human is your best bet.
But be warned – this advice comes at a premium.
Robos that do offer advice don't actually charge a premium from our assessment.
Others, like Scalable Capital do not offer financial advice. It holds discretionary investment management permissions meaning the firm holds responsibility for the investment decision making and transactions.
The algorithms that power robo advisers are configured by flesh and blood humans - so if the humans make a bad call, the portfolio suffers
How does your robo-adviser invest? A deep dive into one.
Investment approaches also differ.
Robos are new and so proven history of investment excellence is short, making it hard to compare performance today. What we have seen from very short time frames is that even the robots are programmed by humans – and if the humans make a bad call, the portfolio suffers.
For example some robos made adjustments to offload US exposure before last year’s election and then suffered when US markets unexpectedly rallied. This is still a man and machine combination.
As an example, we dived into the one that you mentioned Scalable Capital, which uses something a bit different to the traditional investment committee approach - to explain what it does.
Scalable Capital adopts what we call a 'Value at Risk' approach. This is geek speak but each portfolio is described with a percentage. You the investor know that their aim is to promise that you only run the risk of losing more than the specified percentage amount in one year out of every 20.
For example, pick their 20 per cent portfolio illustrated above, and you should not expect to see losses of more than 20 per cent in more than one year out of every 20. It helps to put numbers on the risk we are taking in the hope of better returns.
It is important to note that there are no guarantees when it comes to investments, so there is still a possibility for losses that exceeds the 20 per cent ceiling.
Labelling portfolios with percentages arguably sounds much more complicated than the more typically appealing word descriptors such as ‘cautious’ or ‘balanced’. But many would argue it’s a much more specific way of managing investors’ expectations.
This unique approach from Scalable Capital does attract a customer base which is typically more financially savvy than your average Joe. Around two-thirds of its clients have a background in economics, technology or engineering. At 20 percent of all clients, bankers are the largest customer group.
Rather than be put off by this, I think it’s reassuring - and remember, there’s no maths test to check you fully grasp what is going on under the bonnet in order to become a client!
Robo-advisers are new and so we have to assess longevity and how likely they are to succeed. With still limited information to go on. And some will inevitably fall by the wayside.
Scalable Capital has raised decent amounts of funding from some institutional backers and has an established business in Germany too.
Your money is actually held by their custodian bank, Winterflood Securities (part of the established Close Brothers Group) and some protection is offered by the Financial Services Compensation Scheme.
It’s important to check that any robo-adviser you consider has a solid, global custodian bank – if the robo goes belly up your money is held in a ring-fenced account by these custodian banks and you are protected.
Scalable Capital is not an established brand with decades of experience and pots of cash in the vaulted coffers. But I rate the management team, what I’ve seen so far is good (if the techno speak doesn’t make you short circuit) and I think in general that robo advisers are a great addition to the scene.
I would just caution investors to keep an eye on both performance and levels of assets under management. The robos that will fade away will be those who cannot evidence competitive, ongoing performance and those who are not ramping up the growth curve as fast as competitors.
This article first appeared on Thisismoney on 27th June 2017. Full piece can be read here.