Professional financial advice can not only be expensive, but is also generally only accessible to those with significant savings. That’s not to say it doesn’t play a vital role, and many people benefit hugely from having an adviser manage their cash.
But for those who can’t afford to pay an advisor, or perhaps only have small sums to invest, there is often an ‘advice gap’ which robo-advisors aim to fill.
These services usually provide a selection of ready-made investment portfolios, some of which are aimed at novice investors, whilst others target more sophisticated investors, who might be comfortable accepting a higher level of risk in the hope of potentially higher returns.
You’re directed to a portfolio that should be suitable for you after answering a series of questions. These questions typically focus on your approach to risk (how much can you afford to lose), your financial objectives, and your investment timeframe (how soon you might need to access your money). The robo-advisor will then use algorithms to help them work out which investment options could be suitable for you.
There are still fees to pay if you use a robo-advisor, but because there’s no human interaction involved, costs are typically lower than if you were to use an independent financial advisor (IFA). Costs to invest with a robo-advisor typically tend to be in the region of 1% a year, but may be more or less than this depending on the amount you invest. Costs in the financial world are notoriously difficult to understand and compare like for like, as this 1% a year also usually includes the platform fee for ongoing management of your investments, as well as the fee for the robo-advice.
Remember that because your cash is going into investments, there are no guarantees that you’ll get back what you put in, as the value of these investments can fall as well as rise. Unlike in a savings account, the amount you invest – your capital – is at risk.