When it comes to making decisions about investing, a lot will depend on how much control you want to have. If you’re happy with the idea of assembling and managing your own Individual Savings Account (ISA) investments, you may well consider a DIY investing platform — such as AJ Bell, Hargreaves Lansdown or Interactive Investor.
But if you prefer the idea of someone doing the legwork for you — or want more help choosing investments — you might want to consider a digital investing service (often also referred to as a robo-adviser). There are now a whole host of these services, which offer ready-made portfolios suitable for different types of investors. Here we take a closer look.
How do they work?
With a digital investing service, you typically begin by filling out a short questionnaire about your financial goals and attitude to risk. Jason Witcombe from financial planning firm, Empower Partners, said: “A robo-adviser will typically ask you a range of questions to explore your understanding of investments and attitude to risk, as well as your investment goals.”
In addition, the algorithm will also ask about your likely investment timescale. At the end of the process, it will recommend a portfolio from a range of perhaps five to 10 options. Witcombe added “Your portfolio will generally be automatically rebalanced back to the pre-agreed target as and when markets move, so that you can take a hands-off approach.”
While digital investing services use technology to make it easy for you to choose and manage your investments — they will have very different product and investment ranges. They also come with varying levels of guidance. Fees can vary, but as a guide, you could find yourself paying between 0.7%–1.15%.
What are my options?
Nutmeg was one of the first digital investing apps to hit the market and is one of the best known. It has 10 risk-rated portfolios and different costs for the various services it offers. Elsewhere, Wealthify is easy to use, and a good option for beginners. It offers users five risk categories and will let you get going from just £1. Moneyfarm, which incorporates an element of advice, is also good for beginners, while Moneybox is another interesting option. Equally, those looking for a low-cost digital investing service might want to consider the relatively new-to-market InvestEngine.
You can use our free comparison tools to see how the different options stack up.
What are the pros?
Low cost
One of the key upsides are fees are typically much lower than those charged with financial advisers.
Simple
Can be a good option for those with simple needs and/or for those with relatively little investment knowledge.
Convenient
A digital investing service is easy to set up via an online platform or app, and then easy to use. You don’t have to worry about things such as portfolio allocation, as decisions are made on your behalf.
Diversification
Digital investing services will build diversified portfolios for you, spread across a range of assets, including equities and bonds.
Low minimum investments
It could be £100, or in some cases, even just £1.
What are the cons?
Lacks human interaction
On the downside, this approach to investing lacks human interaction and you will get little — or zero — communication with an actual adviser. This can prove tricky if, say, you have less traditional goals. A lack of human touch can also prove detrimental in more volatile markets.
Generic risk-based portfolios
You will usually end up with a generic risk-based portfolio. This may not take account of more complicated circumstances and requirements.
Too simplistic
A digital investing service may not work if you don’t fit neatly into the cautious or adventurous risk category.
General guidance
A digital investing service usually offers general guidance as opposed to tailored advice. You cannot request specific advice, such as estate planning or tax planning.
Risk
Investing is still risky; just because a digital investing service is automated, this doesn’t make it risk-free. Your investments can still go up and down.
What are the alternatives?
It can be helpful to summarise your options into three main categories:
Taking a DIY approach
With this option, which might mean self-managing stocks, there’s no advice (but you may have access to lots of information and resources).
Using a digital investing service
As described above, where there may be an element of advice or guidance.
Using a human adviser
Where you get full independent advice and planning with personalised recommendations based on your circumstances, objectives and other factors.
Which one should I choose?
Done well, a DIY approach can be lower cost than digital investing service — and leave you feeling much more in control. Many of these services provide articles, guides, ready-made portfolios and favourite funds lists that can help you put your portfolio together. We have more on how to research funds to get you started.
But if you want some level of advice, you essentially need to choose between a digital investing service and a human adviser. A digital investing service can be a great option if your needs are relatively straightforward and you’re looking for a hands-off approach. To find the best DIY platform or digital investing service, use our free comparsion tools to compare the ones best suited for your investing goals.
If, however, your circumstances are more complex, or if you want tailored guidance, you might want to look at the more traditional model. Witcombe said: “There is much more to personal financial planning than just putting money in a portfolio. Most financial advisers have a much more comprehensive service and advice offering than robo-advice firms. But naturally, this personalised advice comes at a higher cost.”
While a financial adviser will set you back more than a digital investing service, they will typically manage your money and recommend investments you should make, while looking at your tax and legal position. They can also advise you across a wider range of financial matters, beyond investments.
As a guide, you could face charges of around 2.4% of your investable assets for an initial review and then 0.8% a year for ongoing reviews. Just bear in mind that fees can vary depending on the type of advice, the complexity of your needs, and how the adviser charges. If the adviser charges an hourly rate, expect to pay around £200. Be sure to find out about charges upfront. Read more about finding a financial adviser and the differences between DIY investing and financial advice.
If cost is an issue, a financial coach may offer a cheaper alternative. A coach will focus on financial education and money-management habits — helping you build confidence in handling your finances yourself. Just note that a coach offers guidance, and not advice. Moreover, unlike financial advisers, they are not authorised by the Financial Conduct Authority (FCA).
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