Robo-investment businesses are on the rise. It’s a trend not lost on venture capitalists and individual investors looking to back the next big start-up success. Dr Richard Theo, CEO and co-founder of Wealthify explores the opportunities on offer to invest in and back a robo business and the factors to consider to help potential investors pick a winner.
Ask someone to describe a robot and there’s a good chance they’ll conjure up images of metallic automatons mindlessly doing humanity’s bidding, or evil machines on a mission to wipe us all out.
Chances are they won’t think of a vacuum cleaner, a car, or an investment manager.
The reality is that modern robots are not humanoid. From the personal assistants like Siri and Cortana, to the drones delivering your online shopping, and the nano-bots being developed to treat diseases from inside us, robots are already playing an active role in most of our lives.
They’re even promising to revolutionise the investing, by offering easy-access, low-cost investment products to the underserved mass market.
Known as robo-investing, these services use sophisticated algoritms to manage part or all of the investment process. And, encouraged by growth predictions valuing the global market at as much as $2.2tn by 2020 – they’re also on the rise.
It’s a trend not lost on venture capitalists and individual investors looking to back the next big start-up success. Millions have already been ploughed into these robo businesses via crowdfunding and angel investing routes – and it shows no sign of slowing.
But like their creators, not all robots are born equal. So what should those planning to invest in robo-investing services look for, and what factors are important in helping you pick a winner?
Look beyond the robot
In today’s financial markets, where speed and accuracy are king, there’s no doubt that computers have the upper hand. Their precision and power trumps human ability many times over, which is precisely why many of today’s institutional investors are increasingly reliant on automation.
However, a robot is only as good as its programming. So it’s also vital that as an investor, you’re confident in the humans pulling the levers.
Expert investment credentials are obviously crucial, but so are people who clearly get technology and how it can be applied to complex markets. Look at their track records: their experiences, their past successes and failures. Generally speaking, it’s not normally an entrepreneur’s first idea that changes the world. And above all, remember that people buy from people, so get to know the team. Speak to them one on one. If they are the kind of people you would buy from, the chances are customers will think in the same way.
With robo-investing, it’s also important to ensure that the right balance between humans and robots is being struck, with each playing to their strengths.
Robots are great at the ‘heavy lifting’; processing and analysing the vast quantities of information needed to keep an investment portfolio on track. But as recent events in America showed, left to their own devices, investing robots can sometimes do more harm than good. That’s where intelligent, qualified investment managers play a vital role in keeping a watchful, reassuringly human eye on the money.
Understand the service
‘Robo’ is a fairly ambiguous phrase, widely adopted as an umbrella term for the automation and digitisation of various parts of the investment process. In practice, it covers two distinct models. The first is robo-advice, which recommends you a suitable basket of investments based on your answers to a short set of questions about your circumstances; robo-investing, in contrast, does not give advice, it simply uses algorithms to select and manage a portfolio on someone’s behalf.
So, when investing in robo, be sure to understand exactly what service they are providing. Is it robo-advice, robo-investing, or a combination of the two?
And given that robo’s key selling point is the potential to democratise investing for the mass market, accessibility is also key. Does the service explain its offering in a clear and simple way? The old elitist financial jargon should be out, along with any intimidation and confusion. If you can’t understand the company’s offering as an investor, then how will their customers?
Check the fees and minimum investment thresholds
When it comes to creating an investing service that’s accessible to millions, it’s vital to address affordability. Traditional investment services are known to charge £150 per hour for advice and expect a pot in excess of £50k, both astronomical figures for the quarter of Britons with less than £3,000 in savings.
Add to the high fees and complicated pricing structures and there’s little wonder that a significant number of people are turned off from investing, according to research by Wealthify.
With this in mind, make sure that the robo you choose to back has a competitive and simple pricing structure that doesn’t require initial investments in the thousands of pounds. Someone with a £3,000 savings pot won’t want to put a third of their hard earned cash in one place, or pay more than 1% per year in charges.
In a market lacking in recognisable brand names, first-time investors are likely to be just as discerning about the quality of the service as the fees, so you should assess the method behind the marketing. Can the service build a truly diversified portfolio for someone with just a few hundred pounds to invest? This boils down to the choice of funds at their disposal, whether they deal exclusively with ETFs, or use fractional funds that can introduce more asset variety into a low-value plan. So, check out the investment vehicles they use and look closely at the terms and conditions to make sure there’s no hidden minimum recommended portfolio value.
Robots to riches
In finance, as in life, robots are undoubtedly set to play a leading role in our futures. Their application is already heralding the democratisation of investing in the UK, opening up what was once the preserve of the few, to millions of Britons. And with around £700bn curerently languishing in cash ISA and savings accounts earning a pitiful return, the robo-revolution comes not a moment too soon.
Given that the slightly more mature US robo market already manages an estimated $60bn of assets, and with an appetite for investing amongst UK savers growing daily, backing the new wave of start-up UK robo business presents real opportunities for angel investors and crowdfunders. It´s just a case of backing the right one – but with some due diligence, you could go from robots to riches in no time.