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Nutmeg & Robo-Advising
Robo-advisers have taken investing by storm in the US and are now doing the same here. But ‘robo-adviser’ is actually a misleading term – here’s why.
Put simply, robo-advisers invest money on their customers’ behalf. The customer chooses the risk level, and the robo-adviser does the rest.
So where does robotics come into it – and how about ‘advice’?
Behind the scenes at most robo-advisers is actually a human investment team. At Nutmeg, for instance, they have a team of expert fund managers and analysts who build our portfolios. The same is true of most of Nutmeg’s international and UK competitors.
This isn’t universally true, however, as some firms do use algorithms to manage their customers’ investments. But these examples are quite rare.
In this sense, the term ‘robo-adviser’ is a misnomer: it generally isn’t machines doing the investing, but an expert team of real people.
What about ‘advice’ – do robots give advice?
Although robots don’t decide how to invest customers’ money, companies like Nutmeg do use algorithms to help customers choose what risk level is right for them.
When you sign up with Nutmeg, you’ll be taken through a series of questions exploring how you feel about risk, and how you’d respond to poor investment performance.
Depending on how you answer, the assessment will recommend a risk level that is right for you. There’ll be a range of portfolios at different risk levels.
So how do robo-advisers invest?
Robo-advisers tend to use ‘passive’ or index-tracking funds, because these are low-maintenance and can be provided at a low cost.
Using these funds – called Exchange-Traded Funds, or ETFs – investment teams create globally diversified portfolios of hundreds or thousands of stocks, bonds and other assets such as gold. Diversification provides protection against shock events, such as political crises or individual company bankruptcies – events that can seriously damage a portfolio composed of just a few handpicked stocks.
Why are they so popular?
Low fees are a major draw, particularly to people investing small amounts. Compared to the rates charged by traditional financial advisers, robo-advisers offer a significant saving.
Furthermore, the annual management fees charged by traditional investment houses are around 1.24 per cent on average (FT Money Guide, June 2016). This doesn’t compare favourably to the lower costs to own index tracker funds, usually around 0.1 or 0.2 per cent. These differences are particularly significant for people planning to invest over a long time period, due to the effects of compounding.
Low minimum investment levels make this form of investing accessible to people who can only afford to save a small amount, which means this way of investing can appeal to younger people.
Sounds good. What are the limitations?
If you have more complex requirements for your finances, such as tax or estate planning, it’s likely that you’ll still require a personal financial adviser, at least for the time being. However, a combination of the two approaches could mean you’ll still get personal advice where you need it, while potentially saving a lot of money on investment fees.
What does the future hold?
Some analysis suggests that automated financial advice might replace traditional face to face advice altogether. Most people believe the two ways of investing can co-exist and complement one another, with different forms of advice appealing to very different types of investor.
Undoubtedly, the sector is growing fast: US bank Citigroup estimates that assets managed by robo-advisers worldwide could reach $5tn during the next decade. This year, Nutmeg passed a major milestone – we are now trusted by our customers to manage over half a billion pounds of their money. We’re confident that this is only the beginning.
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