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I'm a busy City professional who wants to invest without any hassle, should I stick £30k with a robo-adviser?

17/09/2018

Boring Money Bus.jpg

​Holly makes some suggestions for one of our readers looking to invest for the first time.

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

Liza's savings and investments 

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

Shares: none

Funds: none 

Savings: £30,000

Mortgage: none 

 

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.

The pie chart shows the asset allocation of a Scalable Capital 20% VaR portfolio on 8 June 2017
In general I think robo-advisers are a great idea for people who either don’t have the time to monitor and manage their investments on a regular basis – or for people who don’t know where to start. 

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.

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    • Online Investment Platforms
    Holly Mackay's Response

  • Is there a reason you don’t list Saga in your Best Buys? Additionally, I have purchased a few investment trust shares but can’t work out how the dividends are paid. Scottish Mortgage is an example. I wasn't given an option to choose how to receive the dividends. It would be useful if you could provide some clarity on how investment trusts pay their dividends.

    Carl | Buckinghamshire | 07/09/2018 | 1

    • Shares
    • Online Investment Platforms
    Holly Mackay's Response

  • Can you advise me on the best approach when looking to invest in a product that offers compound interest? I’m thinking about funds rather than bank accounts. I also have 4 different pensions on the go. Should I keep them separate to diversify the risk? Or consolidate them? How will these pensions be treated when I retire? Will they be considered in aggregate by the tax man?

    Craig | Clackmannanshire | 16/08/2018 | 1

    • Private Pension
    • Online Investment Platforms
    • Funds
    Helena Wardle's Response

  • I have about two thirds of my ISA in funds with Charles Stanley Direct and about one third left with St James's Place. I was planning to transfer the remaining one third to Charles Stanley Direct. However the recent platform price increases seem to put me in the worst position possible. After Charles Stanley Direct's fee increase, could I do better elsewhere?

    Gerry | Bedfordshire | 15/08/2018 | 6

    • Private Pension
    • Online Investment Platforms
    • Funds
    Holly Mackay's Response

  • I invested my money in a St James's Place managed fund, split into ISAs and bonds, after advice from an adviser who was a St James's Place partner. My investments have done reasonably well, but I've read disturbing reports about St James's Place. Should I have concerns? Should I have found an independent financial adviser?

    Glyn | Essex | 09/08/2018 | 8

    • Funds
    Holly Mackay's Response

  • I wanted an investment trust with an income, so I put £10,000 into The Investment Company. It delivers a reliable quarterly dividend but the capital value has dropped by 10% since I invested 2 years ago. What are your favourite investment trusts?

    Fran | Greater London | 08/08/2018 | 4

    • Shares
    • Funds
    Mark Dampier's Response

  • Is there an average number of funds that one should ideally hold? I have in excess of 20. I am happy with my portfolio and coverage, but wonder if I have too many funds. The second part to the question is how long should you leave an underperforming fund?

    Richard | Hertfordshire | 06/08/2018 | 3

    • Funds
    Holly Mackay's Response

  • I'm 24 and would like to begin investing. Am I better off using a robo advisor such as Wealthify/Wealthsimple or a fund such as Vanguard LifeStrategy?

    Amanda | Greater London | 06/08/2018 | 7

    • Shares
    • Robo Adviser
    • Online Investment Platforms
    Holly Mackay's Response

  • I am 73 and cautious. There are two areas that your advice would be helpful..what if you just spend thousands on buying the gold standard footsie companies like shell and the rest and keep them for five years and then cash them in ?

    DB | UK | 24/07/2018 | 6

    • Robo Adviser
    • Online Investment Platforms
    • Funds
    • Pension
    Holly's Response

  • Nutmeg require a minimum investment of £5,000. As I have less than £5,000 per annum income I am a bit confused about how much I can put into a pension. I know the government will only gross up a maximum of £2,880 per year but can I put more than this in and forgo the gross up?

    Barbara | Hertfordshire | 10/07/2018 | 1

    • Robo Adviser
    Richard Allum's Response

  • I hope you can help. I recently consolidated two modest pensions into a SIPP in readiness to start UPFLS drawdown in May (2018). Whilst I was hoping for growth in my investments I wasn’t expecting it to rocket and now find I could well be looking at exceeding the lifetime allowance, possibly even before my first annual drawdown in May, and I’m unsure what, if anything, I should do.

    John | London | 03/07/2018 | 3

    • Private Pension
    • Funds
    Richard Allum's Response

  • What are the differences between income and accumulation income funds? How do you declare income reinvested in a fund on your tax return?

    C | 05/06/2018 | 0

    • Funds
    Helena Wardle's Response

  • We have a portfolio of ISAs/PEPs worth around £250k, currently invested via Cofunds, managed by Chelsea and Bestinvest. I'm told this is quite an expensive option regarding platform charges. Are there better options?

    John | Berkshire | 08/05/2018 | 6

    • Robo Adviser
    • Online Investment Platforms
    Helena Wardle's Response

  • I would like to open a Junior shares ISA for my Grandson for about £50/month. How do I go about it and can you recommend some reliable companies?

    Roger | Surrey | 26/04/2018 | 2

    • Junior ISA
    • Shares
    Holly Mackay's Response

  • Can you recommend some very basic books for a 69-year-old widow who is now having to manage her money?

    Martha | 12/04/2018 | 0

    • Shares
    • Funds
    Helena Wardle's Response

  • I just found your web site (recommended in Andy Bell's book on Do It Yourself investing). Could you say why you do not review Halifax Share Dealing in your list of ISA providers? Is there anything wrong with this ISA provider for you not to include it?

    Gerald | UK | 11/04/2018 | 0

    • Shares
    Richard Bradley's Response

  • Hi, I've got an old D.B. pension, approximate value £12k. I would like to invest & top up each month. Who would you recommend? Also I would like to make an investment, & don't know where to start? Thanks

    Eve | 04/04/2018 | 5

    • Funds
    • Pension
    Helena Wardle's Response

  • I am post-divorce with a good settlement which I have only partially invested. Are there any courses you can recommend? I have sat in a number of meetings with accountants and financial advisers feeling somewhat patronised! I am sure that there are plenty of women in a similar position to me (aged 55!).

    Eavan | Ireland | 14/03/2018 | 3

    • Shares
    • Funds
    • GIA
    Holly Mackay's Response

  • How can I find a good financial adviser?

    Byron | Greater London | 01/03/2018 | 1

    • Shares
    • Funds
    Holly Mackay's Response

  • I am very lucky to have just received a gift which I want to invest for our retirement. My husband and I aim to retire in around five years. We have 11 more years of school fees to fund, then hopefully university fees for two after that. I've put together a plan for us - can you have a look and see if it makes sense?

    Fiona | UK | 18/01/2018 | 6

    • Private Pension
    • Stocks and Shares ISA
    • Junior ISA
    • Shares
    • Cash
    • Online Investment Platforms
    Holly Mackay's Response

  • We have four grandchildren (2 English living in UK, and 2 Irish living in Eire). We have decided to start savings plans for their futures. Their ages are 18yrs, 11yrs, 8yrs and 4yrs respectively. My age is 75yrs, and my wife is a little older. What should we do, please?

    John | Buckinghamshire | 01/01/2018 | 1

    • Junior ISA
    • Lifetime ISA
    • Shares
    • Funds
    • Inheritance
    Martin's Response

  • I am already receiving a pension from a final salary scheme and I am retired. I have a sum of money I want to invest. Can I start another pension as a saver and, if so, how much can I put in every year?

    Collette | Greater London | 25/11/2017 | 0

    • Private Pension
    • Online Investment Platforms
    Boring Money's Response

  • How do I start investing, buy stocks, bitcoin, etc with £100?

    Claudette | Bedfordshire | 18/11/2017 | 1

    • Shares
    • Other
    Holly Mackay's Response

  • I am a 59 yr old retired lady with no income but I have reasonable equity..is it worth starting a pension or is it too late?

    LL | Norfolk | 10/11/2017 | 2

    • Private Pension
    • Shares
    • Pension
    Cherry Reynard's Response

  • I am getting long in the tooth at 79, a little forgetful and I am going through a painful divorce. This has shattered my confidence and I need help.

    Richard | Kent | 05/11/2017 | 3

    • Private Pension
    • Funds
    Holly Mackay's Response

  • I have just sold my house and have a significant sum of money I want to invest. I may want to draw some income but also want to achieve capital growth. Are there funds that aim to achieve both or should I just invest for growth and draw money as I need to for income?

    Jon | Surrey | 13/09/2017 | 1

    • Funds
    Peter Matthew's Response

  • I have a delightful 12 year old daughter and she has just opened her first bank account. I am dreadful with money but I would like to know what I should teach her so that she does not pick up my bad financial habits. Do you have some top tips of things to teach our children so they are wise and responsible with money please?

    Louise | Greater London | 11/09/2017 | 1

    • Junior ISA
    • Shares
    • Cash
    Lesley James's Response

  • I am particularly interested to know whether it is best to diversify and try and cover of a number of shares with investments or to pick out a smaller number and invest more?

    Richard | 05/02/2017 | 3

    • Shares
    Holly Mackay's Response

  • I am confused about index funds, e.g. Vanguard Equity fund. Do they track an index or include the yield? In the case of Vanguard, their low cost is attractive but their portfolio is made up of other Vanguard funds. I assume these probably each carry a fee structure - is this correct?

    Robin | Gloucestershire | 03/09/2018 | 0

    • Online Investment Platforms
    • Funds
    Boring Money's Response

  • Is it worth using a financial adviser when it comes to switching pensions funds, or should I do the research and pick the funds myself? I am no expert in stocks and shares.

    Helen | Dorset | 10/08/2018 | 4

    • Private Pension
    • Shares
    • Funds
    Helena Wardle's Response

  • I've got £20,000 from an endowment policy (astonishing, I know), and I'm looking into how best to invest to get a reasonable return without excessive risk. Any thoughts much appreciated!!

    Penny | Peterborough | 09/08/2018 | 1

    • Stocks and Shares ISA
    • Cash
    • Online Investment Platforms
    • Life Insurance
    Boring Money's Response

  • I use H&L and although they are a bit 'plumy' on the phone I quite like their website and the costs are OK. So I was thinking of H&L for [my son]. I would be telling him to open these two funds and regularly invest and forget about them for 10 years!

    R | Greater London | 29/05/2018 | 1

    • Lifetime ISA
    • Robo Adviser
    • Online Investment Platforms
    • Funds
    Holly Mackay's Response

  • Should I be even thinking about the stock market?

    Lysa | Greater London | 06/09/2017 | 0

    • Stocks and Shares ISA
    • Shares
    Holly Mackay's Response

  • What funds could my millennial children invest in?

    Anthony | Greater London | 06/09/2017 | 2

    • Funds
    Holly Mackay's Response

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