Do Robo-Advisors Really Offer Free Investment Advice?

The recent acquisition of UK robo-advisor Wealthify, which was only launched early last year, by insurance and investments giant Aviva could well mark the next stage in the growth of the quickly developing market segment. It will be interesting to see if other robo-advisors are acquired by the big retail-facing money managers in the coming months and years, and which will launch their own inhouse products.

Robo-advisors are online investment platforms which automate the role of the traditional IFA (independent financial advisor). Their emergence is seen as an answer to the ‘advice gap’ that appeared when the Retail Distribution Review stopped the practise of UK-based IFAs offering ‘free investment advice’ to clients but making commissions on the investment and savings products they bought into. Since RDR came into force, IFAs have been forced to charge upfront fees. Often charging well over £100 an hour, the true cost of personalised investment advice has understandably put a large section of retail investors off, who were forced to either do their own DIY research on investments or shun them altogether.

Robo-advisors ask clients to fill in an online questionnaire that covers the same information on their investment aims and personal financial circumstances as an IFA would do as part of an initial consultation. The robo-advisor then matches the client’s profile to one of the range of diversified investment portfolios they offer on the understanding that is the one that best fits them.

However, a valid question that has been asked of the robo-advisor market is that can the service they provide genuinely be considered to be personalised ‘advice’ and is it really ‘free’?

On the first question the best answer, despite its obvious ambiguity, is probably both ‘yes’ and ‘no’. All a robo-advisor really does is match a client profile with one of a selection of off-the-shelf investment portfolios. It’s not creating a completely unique portfolio just for you. In that sense it’s not truly ‘personal’ investment advice.

On the other hand, the reality is that this is exactly what a human financial advisor does for most clients. The majority of retail investors can be split into several profile categories based on their net worth, regular income, appetite for and tolerance of risk and investment aims. An IFA might slightly tweak a portfolio from client to client but will also have range of ‘go-to’ portfolio structures. A really personalised approach will only ever really be taken in the case of high net worth investors that have investment portfolios worth millions. So in this sense, the service provided by a robo-advisor will for most be pretty similar to what they would get from an IFA.

On the second question, using a robo-advisor is, of course, not ‘free’. They are businesses and must earn an income. While there is a degree of variation, all-in fees investors pay on a robo-advisor portfolio in the UK come in at under 1%. Actively managed fund fees are an average of 0.9% in the UK so, if more expensive options are avoided, this works out at roughly the same. However, if funds are chosen and bought as a DIY investor, the investment platform will also charge an addition fee, bringing the cost up so the robo-advisor will most likely work out cheaper. If a DIY investor buys only passive index-tracking funds (ETFs) that usually charge annual fees of around 0.2% that could work out cheaper than using a robo-advisor. But the investor would have to do all their own research on what funds to buy.

In conclusion, while not exactly ‘free’ and not exactly ‘advice’ robo-advisors can be said to offer a very good value service that is the approximate equivalent of what most retail investors would receive from an IFA.