Would you trust a robo-adviser with your money?

Robot
A completely inaccurate depiction of a robo-adviser
"The world of investing is a bit shrouded in mystery, but the simplicity of robo completely demystifies this and opens it up to more people"
  • | by Amy Pay

Is it time we cut out the human middleman completely and trusted our money to algorithms when investing? 

As a proposed solution to the lack of affordable and easily accessible financial advice, robo-advisers are growing in popularity and prominence.

At the input of a small amount of personal and financial information online, robo-adviser software assesses a person's situation and generates tailored financial advice on their potential future investments.

The trouble is, could - and should - you trust a robot with your money?



Room for robo-advisers

Man and woman looking at laptop in cafe

Honest and reliable financial advice is hard to come by, especially as help is often offered by biased sources.

With frequent news stories about dry pension pots and increasing living costs, it's no wonder people are considering alternative ways of putting cash aside.

By eradicating the need of human involvement in the process, robo-advisers provide a low-cost unbiased option for people and companies with small sums to invest.

That said, there's some hesitancy in embracing the emerging technology. According to a survey by global banking group ING International in 2017, just 1% of UK consumers with money to invest would turn to a robo-adviser for advice.

This is compared to 23% who would choose a bank adviser and 23% who would turn to the internet or specialist websites.

Fear of FinTech?

So with 42% of UK consumers saying they wouldn't trust a robo-adviser to make financial decisions for them, the public confidence in these financial bots is lukewarm at best. Potentially a few people are having Skynet nightmares...

"Although letting algorithms make money decisions for us has the potential to be advantageous and free up some headspace, many people are unwilling to give up control of their finances to technology like robo-advisers," says Nathalie Spencer, behavioural scientist at ING.

"It could be that as people become more familiar with the technology they will also become more comfortable, especially given the personalisation and convenience they are able to offer," she continues.

"Until then, it's likely that the human desire to control financial decisions will mean that most will want final approval before handing over their hard-earned cash."

Ease of use

Woman on tablet

So what do the early adopters think?

Rich McCloskey from Bristol used Wealthify's robo-adviser for his personal savings.

Previously he'd invested by choosing his own stock, but he wanted a more sophisticated way of investing without incurring costs from professional advisers.

"Robo allowed me to feel as though the mix of investments was right for my risk level," says Rich.

"It gave me the confidence that I'd perform in line with the market and that my money was doing much more for me than if it were in the bank."

He also found it relatively easy to use: "The world of investing is a bit shrouded in mystery, but the simplicity of robo completely demystifies this and opens it up to more people.

"Even for those that are experienced and comfortable in this world, like I was, the simplicity makes it so much less time consuming than trying to pick your own stock."

Risks of robo

While Rich feels his robo-adviser was able to accurately invest according to his risk level, the main risk of robo-advice is the lack of uniformity or definitive regulation.

Three different robo-advisers could give three different recommendations regarding investor suitability.

"Developers don't need to adhere to any universal standards, so there's no agreed idea about categorising investors by their levels of caution or aggression," says James Penny, TAM Asset Management's senior investment manager.

"Incorrectly categorised investors stand to lose a lot more than they can afford, because definitions of risk are determined by algorithms, and these algorithms are essentially unproven."

As well as this incoherence in the system, the fact that information is input by the user means that people can make incorrect estimates of how much risk they can tolerate. One piece of false data could mean someone is given the wrong advice from their bot, so always double check your information.

Meeting the bots halfway

Man on phone with tablet

For all the risk that comes with using robo-advisers, there are many positives - they're relatively affordable, fast and easy to use.

Another option is to use a non-advised digital investment management platform. This software uses some automation for things like risk balancing or market analysis, but there's also a human investment team or asset manager that makes the investing decisions.

Having an asset manager on hand to check everything over and give advice based on real-world experience can make it less likely for investments to fail.

It also positions the bots as data-gatherers rather than substitutes for humans, so there's options suitable for everyone.