Robo-investors refer to websites, apps or other platforms where you as the investor simply pay in your money, choose an investment strategy, then the manager invests your money and rebalances your portfolio for you.
Risk and plan selection
Generally, a robo-investor offers a suite of packages based on risk tolerance. For example, the Weathify app I use offers plans with names like “Cautious”, “Confident” and “Adventurous”.
Most of these plans are structured so that the “lower” risk plans (which typically means lower volatility risk) has a heavier weighting in gilts, government bonds and cash-like securities. Higher risk plans will have more of a weighting in favour of equities, and this might include private equities or alternative asset classes.
Ethical investing
Many robo-investors will offer an “ethical” option, too. How these differ from a normal style plan depends on the platform’s interpretation of what ethical means!
I use Wealthify for my general investment account. Their stance on ethical portfolios is that actively-managed funds make up their investment in equities, because a passive fund doesn’t use its shareholder powers to call companies to account. In their eyes, you can’t have effective, passive ethical investments.
Meanwhile, Nutmeg refers to socially responsible investing, but the description it uses refers to excluding companies that don’t meet set criteria.
In both cases, the fees are increased for an ethical portfolio. Wealthify doesn’t increase its own fees, but the fees are quite high in the ethical funds it has chosen. Nutmeg goes the other way and has higher fees on its end, with higher-than-average but tolerable fees on the funds it uses.
More on fees below.
Alternative assets?
Since you’re investing through an intermediary, you can indirectly invest in all sorts of assets that you wouldn’t be able to do on, say, Vanguard.
In reality, this is a tiny fraction of the portfolio. In my case, it’s currently 3,3% of the portfolio on the app.
I wouldn’t normally be able (or willing) to buy units in alternative investments with small enough amounts to make it work for me. When I’m further in the financial independence campaign that might change, but for now I wouldn’t want to drop a few thousand pounds on a single investment as it would skew my portfolio balance. Having access to this in small amounts through the robo-investor is pretty cool.
Diversification
If you only have small amounts of money, achieving diversification can be tough. Sure, a couple of units in a low-cost index tracker could help you diversify across industry sectors, but you’re still only investing within the public equities asset class.
With a robo-investor, you’re not bound to purchase whole units of an investment trust. There isn’t an option to buy whole shares. Instead, you pay in the money that you want to invest, and the robo-investor pools all like-minded users’ money together to buy in bulk.
The bulk purchase is then allocated to you.
This means that your small investment might suddenly give you investment across, say, a dozen funds. That’s pretty solid.
Rebalancing
Rebalancing is the name for taking stock of your portfolio and buying/selling parts of it to set the percentage allocations back to your original plan. Everyone has a different take on this.
On the one hand, there are claims such as in this Morningstar article, that suggest there can be a performance benefit to be had from rebalancing. Others such as this Forbes article state that while there is a diversification benefit to rebalancing, the risk is that you miss out on good returns.
Most robo-investors provide an ETF portfolio – I haven’t seen any that buy shares in individual companies. There are easily a dozen ETFs that have been squished into the portfolio, so it’s quite easy for one fund that has a bumper year to suddenly dominate the others. If you’re going to rebalance, which you’ll probably want to with this kind of portfolio, it can be a nause to work out how much of each ETF you’re buying and selling until the percentages are correct again.
A robo-investor takes care of the rebalancing burden for you. You’re relying on the professional portfolio manager to have set a good rebalancing policy, but as far as you’re concerned it’s fire-and-forget.
Fees
It’s the fees that make robo-investors less attractive than, say, Vanguard.
My combined fee on the Wealthify ethical plan can be as high as 1.2% – that’s a 0.6% per year platform fee, plus a fund fee (that’s higher because Wealthify only use active ethical funds). The non-ethical one is around 0.76% total fees per year.
In comparison, I could easily find an global index fund for 0.3% or lower in fund fees, and there are platform fees which are either free or less than 0.6%.
I’d say that the fees are fair for the product. Robo-investors really are a stress-free system and you get the benefit of a plan modelled in advance by finance professionals. However, I can see why you might not want to pay these fees at all and simply learn to do this yourself.
User experience
I’ve said it a few times now: fire-and-forget.
Wealthify is accessible as a phone app and a website. After getting through registry, I simply set up a direct debt and arrange top-ups by bank transfer.
You can look into the stats to see how parts of the portfolio are doing, but it’s really not designed for that. Effectively, there’s a big dashboard showing your overall performance and some side screens showing allocation amounts.
Withdrawing funds is reasonably easy. I believe it took me 3 days when I trialled it. That’s enough time to add friction/stop unnecessary withdrawals, but not too much of an issue for when you want to live off the pot.
I haven’t used Nutmeg, but I imaging this is similar on their app. I had previously used a platform called Wealthsimple, which I preferred, but they decided the UK market wasn’t worth their trouble and sold the platform.
Why I’m using a robo-investor
My portfolio – such as it is – lives on a few spaces:
- Wealthify
- Trading 212
- My workplace pension
- My defined contribution pension
- Bank savings accounts
- Physical gold in safe storage
- Crowdcube
- Bitcoin on a hard wallet, also in safe storage
That’s a lot to keep track of.
Public equities aren’t the workhorse of my financial independence campaign. At least, not yet. My savings rate (over 50% of take home) is the activity that’s most important to me succeeding on this project.
This all means that for me and where I am now it’s not really worth my time over-optimising when I could automate. Even if I had £100k in public equities outside of my pension (I don’t yet), the difference in fees per year between something highly customised with hours of my time invested into it and something that’s automated and probably good enough is going to be less than £1,000 per year.
And that’s assuming that the robo-investor doesn’t outperform the alternative platform, which it might!
Meanwhile, by simply leaving within my means and working hard, I can optimise for hundreds of pounds per month. That’s a better use of my mental energy. I’m even considering closing the Trading 212 account, simply for the administrative ease, and chucking that onto Wealthify, too.
But… Vanguard?
Vanguard is the darling of FIRE, for good reason. Until very recently I had a SIPP with them, but they don’t offer to Channel Islands customers. Hell, I even helped my own mum set up her SIPP on there.
Having used both, Vanguard is better on fees and is definitely worth looking at. However, ease of set-up and use is much better on Wealthify, and Vanguard’s target retirement funds/ life strategy funds that are sort-of a similar product to a robo-investor aren’t offered in ESG/ SRI/ ethical flavours. Vanguard have some great ESG/SRI funds, but you have to rebalance them if you want more than just public equities in the mix. No alternative assets allowed.
Obviously I can’t use Vanguard even if I want to, but it’s still an option for you to consider.
If you would like to try Wealthify…
Why not use my affiliate link? We both gain £50 if you sign up and invest £250 for at least 3 months. Nice!
