Robo investing: a complete guide
Keen to make your tax-free money work harder for you? A robo investment ISA could be a good bet. We take a look at what to expect and what sort of returns you could receive.
Key takeaways
Robo investing, also known as robo-advisory, is a digital investment service that uses sophisticated algorithms to manage portfolios based on your risk tolerance
Compare various platforms based on fees, minimum investment requirements, and desired involvement
You can include robo investing within your tax-free stocks and shares ISA allowance
Generally, these fees are more affordable than those associated with personal financial advisors
What is robo investing?
Robo investing, also known as robo advising, is a digital investment service that uses algorithms to manage portfolios, typically based on your risk tolerance.
Instead of a human financial advisor, robo advisors automate investment decisions and portfolio management, offering a convenient and often lower-cost alternative.
How do robo advisors work?
Here's a more detailed breakdown of how robo-advisors work:
1. Gather information
You'll complete a questionnaire providing details about your financial situation, investment goals (e.g., retirement, home purchase), and risk tolerance.
2. Create a portfolio
Based on your answers, the robo advisor's algorithms will suggest an appropriate investment portfolio, often consisting of a mix of ETFs and mutual funds.
3. Make investments
The robo advisor will automatically invest your money according to the recommended portfolio.
4. Monitoring and rebalancing
The robo advisor continuously monitors your portfolio and will automatically rebalance it to maintain your desired asset allocation as market conditions change.
5. Fee structure
Robo advisors typically charge a fee, usually a percentage of your assets under management, for their services.
What are pros and cons of robo investing?
Pros
Cost-effective compared to traditional financial advisors
Tailored investment strategies based on your risk tolerance
Time-saving as the robo advisor takes on the work of selecting and reassessing the funds
Investment growth can be tax-free if used as part of your ISA allowance
Some platforms offer the ability to block certain sectors that don't match an investor's ethics
Cons
Platform fees may impact overall returns
Investments can decrease in value
The robo advisor's chosen funds may not always match your personal ethics, though some platforms offer exclusions
How do I choose the best robo advisor account?
When selecting a robo advisor, consider the following:
Account type: Ensure it aligns with your investment goals and risk appetite
Costs: Weigh platform fees against fund management expenses
Additional features: Look out for perks like cashback or automatic rebalancing
Customer support: Make sure you're comfortable with the level of support and the online system, and happy with customer support
What should I consider before using a robo advisor?
Before you commit, keep in mind:
Be mindful of platform fees
Be comfortable with a robo advisor taking the investment reins
Be prepared for a long-term investment to allow for growth
Ensure you are comfortable with the platform fees and the long-term nature of the investment
Consider if you are comfortable with a robo advisor making investment decisions on your behalf
Robo advisor vs manual investing - which is better?
It all depends on your personal preference and how you choose to invest.
Robo-advisors typically charge lower fees than traditional financial advisors. There also isn't any need for regular manual reviews; the robo advisor adjusts the portfolio automatically.
On the other hand, manual investing offers greater control and choice, allowing for a more hands-on approach if that's what you prefer.
Choosing a robo advisor investment account
For those new to investing, we suggest starting with a robo advisor. It's a great way to dip your toes in the water and gradually build your investments, as MoneySuperMarket partners with leading robo investment platforms, offering a wide range of choices for UK investors.
The platform lays out essential information, such as platform fees and minimum investments, making the application process straightforward and quick.
Frequently asked questions
Will the robo investor decide when to sell my investment?
Yes. The robo advisor invests in a series of funds and then periodically buys and sells funds to try to optimise your portfolio. This is known as rebalancing.
Is my money safer with a robo investor?
All investing carries risk, but your investment is neither safer nor more at risk with a robo adviser than through other ways of investing.
Where your money is invested is the main indicator of how safe it is, with more risky assets offering the chance for greater returns but also higher losses.
In the rare event of the robo advisor platform going bust, your investments should still be protected, because the robo advisor is only acting as an intermediary and buying and selling on your behalf.
Author
Victoria Russell
General Manager - Commercial
Vikki has worked across financial services for over 20years, and for the last 15 years, created and nurtured a career within MoneySuperMarket Group, leading to her current role as General Manager for...
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Collette Shackleton
Content Writer
Collette Shackleton is a highly skilled Content Writer who has over nine years’ experience creating helpful and engaging personal finance content for consumers. Collette shares her experience as a...