Using a robo advisor is one of the easiest ways to invest. But how popular are robo advisors with investors? Let’s take a look at how robo advisors did in 2020.
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What is a robo advisor?
A robo advisor is an automatic investing tool. Sign up for a robo advisor account and you’ll answer a set of questions. The answers you provide are used to evaluate your personal investing goals and your appetite for risk.
If your responses show you keen to take a short-term view, then your advisor will be more likely to allocate stocks or shares to your portfolio. Your allocation will differ depending on the provider you choose. The proposed portfolio will likely be a mix of UK-based and overseas assets. Please note that with overseas investments you are also exposed to currency fluctuation risk. Exchange rate charges may adversely affect the value of shares in sterling terms, and you could lose money in sterling even if the stock rises in the currency of origin. Any performance statistics that do not adjust for exchange rate changes are likely to result in inaccurate real returns for sterling-based UK investors.
In contrast, if your answers indicate you’re more risk-averse, you’ll be allocated more bonds. This is because bonds are less volatile in the short term and generally produce steady returns.
Your advisor may even decide to keep some of your portfolio in cash. Remember that while cash can’t be lost in the markets, you can still lose out to inflation.
How can I open a robo advisor account?
Nutmeg, Wealthify and Moneyfarm all offer automatic investing services. Opening an account with these providers is easy and all have an app to view your portfolio’s performance.
For more providers that offer robo advisor services, take a look at our page on investing solutions.
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How did robo advisors perform in 2020?
We all know that 2020 was the year the pandemic took the world by surprise. Yet enforced changes to our everyday habits appear to have had a big impact on the way we manage our money.
Nutmeg, one of the UK’s largest digital wealth managers, reported that investors signed up for its products in record numbers during 2020. The provider also says that 2020 was the year in which its assets under management exceeded £3 billion.
Nutmeg’s end of year results showed a growth rate of 53% since the beginning of 2020, equating to 130,000 extra users. With these eye-watering numbers in mind, it’s perhaps not surprising to hear that Nutmeg’s overall revenue grew 66% during the same period.
As the pandemic has undoubtedly led to many taking more of an interest in looking after their wealth, it’s likely other robo advisor providers, such as Wealthify and Moneyfarm, have also seen an increase in users.
Why are more people using robo advisors?
Government instructions to stay at home and the recent performance of the stock market are both likely to have influenced the number of people looking for ways to grow their wealth. However, please remember that past performance is not an indicator of future performance and that your capital is at risk.
Despite a short-lived crash following the initial shock of the pandemic, 2020 has seen global stock markets rally. It’s probable many new retail investors have been driven by FOMO (fear of missing out) and have looked to robo advisors as easy ways to invest.
This is supported by research carried out by Citadel Securities, a multinational financial services company. The research shows that retail trading increased from the normal 10%-15% of total volumes to 20%-25% during the first wave of Covid-related stock market volatility.
Can I lose money using a robo advisor?
When investing, there is always a risk that the value of your wealth can go down. This is true even if you use a robo advisor to manage your wealth.
Before you invest, it’s important to understand the risks and ensure you familiarise yourself with investing basics.
