If you’re a stock market novice, a robo-advisor offers an automatic way to invest. So what are the benefits of opening a robo-investor account?
The role of a robo-advisor
In the old days, if you wanted to invest your money you had two options. You could pay for a finance professional to manage your wealth, or research and choose investments yourself. In these modern times, robo-advisors introduce a third option to the mix.
Also known as ‘automatic investment tools’, robo-advisors automatically invest for you based on your attitude to risk. For example, when signing up for a robo-advisor, you’ll be asked a few questions to establish your investing preferences.
Should you appear risk averse, you’ll likely be allocated a high number of government bonds. This is because bonds are less prone to big falls. In contrast, if your answers portray you as more of a risk-taker, you’ll be allocated a lot more shares than bonds. These are more volatile but offer higher potential returns in the short term.
Robo-advisors have the ability to rebalance your portfolio too. This means that you don’t have to worry about holding too many bonds over stocks (or vice-versa), which could impact your risk allocation. On this point, it’s worth reading more about the benefits of a balanced portfolio.
The key benefits of a robo-advisor
A robo advisor has a few key benefits.
1. It can be good for newbies
A robo-advisor is one of the easiest ways to test the choppy waters of the stock market. This is a boon if you lack in-depth knowledge of investing. See our investing basics page for more information.
With a robo-investor, you simply sign up, answer a questionnaire and your artificially intelligent advisor will do the work for you. This means you don’t have to worry about making investing decisions yourself, or investing in assets that don’t suit your attitude to risk.
2. Fees are generally a lot more simple
A robo-advisor clearly lists the fees that you will pay for using the service. This is usually a percentage of the amount you invest. This means that you often won’t have to work out the costs of any management fees, trading or platform costs.
3. You can invest tax free
If you use a robo-advisor there’s nothing to stop you putting your investments into a Stocks and Shares ISA. This allows you to access your returns tax free. Tax treatment depends on your individual circumstances and may be subject to change in future.
The drawbacks of using a robo-advisor
As well as benefits, robo-advisors have their fair share of drawbacks too.
Firstly, even if you use a robo investor, there’s a chance you could lose money as all your capital is at risk. Stock markets can go down as well as up, so never invest more than you can afford to lose. Remember, even a low-risk portfolio comprised mostly of government bonds can decrease in value.
Another drawback of robo-funds is the fees involved. While the costs you pay may be more straightforward, for the lowest fees possible, it may be better to invest in a multi-asset fund instead. Multi-asset funds also allow you to invest in a mix of stocks and bonds, without needing to choose investments yourself.
A further drawback is that robo-advisors don’t allow you to choose your own investments because of the way in which they work. While you may not consider this a drawback, many prefer having control of their portfolio by choosing what to invest in. If that sounds like you, see our list of share dealing accounts.