This is the question that we all want to answer and something that Harriet Baldwin, Economic Secretary to the Treasury, is especially keen to understand. Speaking in the press recently, she said: “Robo-advice shouldn’t aspire to be simply a way of commoditising financial advice; it should be used to make advice better.”
One of the key benefits of taking a robo-advice approach is that it removes the emotion from the investment experience. The theory is that by purely trusting the statistics and algorithms the chance of human error is removed.
However, robo-advice is not devoid of human influence. The algorithms have to be designed by a person, and no person has ever been able to perfect the art of market timing with any degree of consistency. If they did they’d be very rich, and unlikely to write an algorithm that achieved the same success for all investors!
The appetite so far
In America, robo-advice has been around for some time and are now considered a mainstream approach to investing. This accounts in part for the 181 per cent increase in the average daily share volume on the New York Stock Exchange between 2005 and 2009.
Robo-advice gives consumers access to investment advice in an affordable and innovative way. Consumers are demanding an always-on, digital world and the arena of financial advice will be no different.
A balanced approach
At Nutmeg we take a ‘managed passive’ approach. We use purely passive ETFs which track the market, but our expert investment team are always behind the wheel making all of the decisions.
As our chief executive Nick Hungerford said at a recent FCA conference: “We don’t give advice. We’re a discretionary investment manager. But unlike traditional managers, our relationship with clients is conducted primarily through an internet-based service with our human support team on hand at the end of the phone.”
The key difference is that charges are lower than other discretionary managers, making our services more accessible to everybody, and we don’t just let the algorithms make decisions. We like to think it gives us the best of both worlds.