Robot wars: How to tell the difference between robo-advisers


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As robo-advice continues to grow in popularity, more online investment management services are being introduced to the market.

But with so many models available, it’s becoming increasingly difficult to distinguish between them.

Consumers are cautious

Recent research from international banking group ING highlights how cautious consumers feel about using robo-advisers.

The report found that 29 per cent of consumers want more than just a simple online investment service – they want financial advice to guide their investment journey.

Interestingly, the study also found that, rather than having a computer manage their money, most consumers would prefer to personally manage their investments, even if it resulted in lower expected returns.

But not all robo-advisers are made equally. Some offer regulated financial advice, and others do not, which can be misleading for consumers.

Telling the difference

If consumers place financial advice above access to investment, as the ING research suggests, then providers need to be clearer about their offering to ensure transparency in the market and allow consumers to invest with confidence.

In my view, robo-advisers that offer no regulated financial advice should be referred to as “robo-investors” instead. The Financial Conduct Authority (FCA) has recognised the need for reform, but it’s still work-in-progress.

In the meantime, there are ways you can try to differentiate between the range of services on the market.

Risky business

With any investment, there is a risk, but with robo-investors the risk can be greater if you don’t fully understand the markets you are investing in.

Robo-investors don’t support consumers in their decisions, they simply act as a portal that takes people’s money. If a financial decision is made using a robo-investor without taking advice, you are entirely on your own, with no one to hold accountable.

Some of these services choose not to give advice to their customers because it involves the risk of them getting it wrong.

It is also much easier to build a system that simply takes instructions and quickly gets the money under management, for which the platforms will then charge high fees.

Value for money

These fees tend to be justified by bold claims about beating the stock market, blinding consumers as to what they’re actually paying fees for, and clouding their judgment when it comes to value.

Don’t be drawn in by such claims. History shows that it is almost impossible to beat the stock market on a consistent basis.

Instead, people should look for a robo-adviser offering a broad diversification of asset classes, and a provider that will clearly explain these to them and advise which is the best fit for their long term investment goals.

Robo-advisers who offer financial advice regulated by the FCA take responsibility for offering you something that fits your circumstances and financial goals.

Human contact

It’s also important to bear in mind that not all robo-advisers offer human financial advice. Many will claim to offer tailored advice, when really it is a generic automated questionnaire. Check that you can speak to a person if you want to.

As the ING research suggests, many consumers feel more reassured putting their trust in a human rather than a computer.

If you’re unsure of your options, find a robo-adviser that allows you to speak to someone who understands your personal financial journey. They will be able to advise in your best interests and help to maximise your returns.

Time for change

The FCA is currently in the process of investigating whether financial advisers are offering investors the best value for money, especially when advising on which funds to purchase. Robo-advisers will also be investigated, particularly around the disparity in service offered to consumers.

Although the FCA has identified the problem, it hasn’t yet offered a solution, with the interim report not set to come out until summer next year.

In the meantime, it’s up to consumers to try to scope out what a service offers before they take the leap and sign up.

Tags: FCA