Monday, 21 August 2017

A Look at UK Robo Advisors

It's a couple of years since my first post on the so-called Robo Advisors and there have been a few developments to the market so I thought I would take another look at some of the current options for the would-be investor.
Robo advisors (RAs) are very widely used in the US via the likes of Betterment and Wealthfront but they are still in their infancy in the UK, but as we all know, new technology is rapidly changing the way we live and work and so we should not be surprised that it will have a significant impact in financial services. Some people are predicting that the traditional roles of doctors, lawyers and accountants could be replaced by artificial intelligence over the coming decade and therefore the role of the financial adviser could easily be added to this list. In the future, increasingly personalized and calibrated apps and personal assistants may be perceived (not just by millennials) as more trustworthy, objective and reliable than in-person advisors.
Around half the population just simple do not have any savings to invest. However many people are wanting to save for the future and exploring the options of investing in the stock market but for many complex reasons they do not actually do so. Many have a cash ISA but only around 1 in 7 hold a stocks & shares ISA and most of these will have been arranged by a financial advisor. Maybe for some they do not have the confidence or experience to do it themselves, others cannot afford the fees of a traditional financial adviser. For many, they perceive this area as difficult, mysterious, complex or just plain boring so are turned off by the thought of ISAs, investing and pensions.
Robo advice platforms therefore provide an opportunity for the majority of these people to invest for the future in a reasonably cost-effective way without having to put in a lot of time and effort themselves. Whilst many would probably prefer to sit down with a financial adviser, when it comes to paying their upfront fees of £150 per hour, not many can afford to do this.
Obviously, the big attraction for the novice or less confident investor is a solution which does not involve upfront fees and maybe more important, you don't have to research and select your own investments - they do this for you which makes it very simple to make a start in an area which may be very unfamiliar.
RAs aspire to fill the role of a traditional investment advisor. Using technology they can create an optimised, low-fee portfolio based upon your personal circumstances and tolerance to risk. For those with moderate savings, fees are generally much lower than they would be to employ a financial or investment advisor to do this for you face-to-face.

How It Works
In general, when you first register they ask you to fill out an online questionnaire to understand your investment goals and tolerance for risk. Age, experience and time horizon will be factors. They then use the information to build an investment portfolio for you. Very roughly, if you have a lower tolerance for risk they would assign you a larger proportion of bonds, gilts and less volatile investments. If you were young, with a long investment timeline and high tolerance for risk, you may be assigned a higher proportion of equities, perhaps more emerging market or higher ‘risk-return’ options.
In general, RAs then buy low-cost ETFs to invest your money according to your risk profile and charge you a small percentage of the amount invested which is less than you would pay a traditional financial advisor. 
In the world of personal finance, the RA could be considered to be good news for those who have felt priced out of traditional investment advice - or who want to tap into new technology to invest. The fees for traditional advice from an IFA or wealth manager would typically work out at 2% or 2.5% on the value of your investment compared to less than 1% with a RA.

The actual services provided by each robo investor differ widely and it's therefore worth exploring their websites to get a feel for the company ethos as well as their approach to investing before you commit any capital. Some provide an app for your phone so that you can monitor your investments on the go. Some have a minimum investment, typically £500 but others allow you to invest as little as £1.

Some Providers

Nutmeg is the most established RA in the UK and is a recognisable name to some Londoners, who have been exposed to the brand through its countless tube adverts.  They offer a full range of options including ISA, Pension, Lifetime ISA and General account. They have two options, the lower cost fixed allocation portfolio with charges of 0.45% and the managed portfolio with fees of 0.75%.

MoneyFarm and Scalable Capital are just two of its best known rivals, but there are many more robo-advice challengers entering the market place.

Moneyfarm was established in Italy in 2011 and launched in the UK in 2016. They offer a general investment account, ISA and Pension. They are particularly attractive on costs for those with limited finances as there are no fees on the first £10,000 of investment. The next £90K however is charged at 0.6%. The fees on the underlying funds are slightly higher than most others at 0.30%.

Scalable Capital launched in 2016 and has its operation in both the UK and Germany. they have a fixed fee of 0.75% plus an average of 0.25% cost of ETFs. They currently only offer an ISA but plan to introduce SIPPs in the near future. One drawback is their minimum sum starts at £10,000.

evestor are the new kids on the block set up earlier this year by Moneysupermarket founder Duncan Cameron and Anthony Morrow, most recently of Paradigm Group. Their mission statement is to make financial advice available to everyone regardless of their circumstances and to lower the costs of this advice.

The costs are competitive with an all-in offering of just under 0.5%. In addition they offer the opportunity to discuss any recommendation with their financial advisor at no extra cost.

Moneybox is another new start up aimed at the younger crowd and passive investor and markets itself as the app that “invests your spare change.” It works by linking up a bank account and rounding up your purchases and investing it in a portfolio. It has three portfolios to chose from, with tracker funds through BlackRock, Vanguard and Henderson.
The platform has no minimum amount but charges a £1 a month subscription fee, a yearly 0.45 per cent platform fee and fees charged by the fund providers, which average ~ 0.23%.


IG Group now offer their customers a range of 5 ready-made' Smart Portfolios' covering ISA, SIPP or General. Charges are tiered according to the amount invested - up to £50K is 0.65% and then to £250K is 0.35% plus average ETF fees of 0.22%. Clients with other types of account with IG such as CFD or spread bet may qualify for a small reduction.


(click to enlarge)


Is This Advice?

Robo advisor is a misnomer because most of these firms are not authorised to provide financial advice in the traditional way. If a company in the UK gives financial advice they have to be (a) authorized to give investment advice by the Financial Conduct Authority and (b) have to know your financial circumstances ​intimately. That's why the term robo advisor is misleading.

If you take fully regulated advice or simplified advice and it turns out it was bad advice for you, you can make a claim against the adviser and are eligible for compensation from the Financial Services Compensation Scheme in the event the adviser is unable to pay. 

The qualified 'guidance' offered by RAs doesn't offer this provision - you take responsibility for the investment decision you make and if it turns out to be a poor one (for example putting all your savings into one high risk investments that then goes under) you have to bear that loss yourself.

Conclusion

There is clearly a large gap in the market for the many people who cannot afford a financial adviser and who do not wish to or cannot diy.

RAs are certainly cheaper than the traditional wealth manager or financial adviser and will appeal to those who lack confidence in a diy approach or just can't be bothered to learn. However the diy investor who is prepared to do some research and use a combination of low cost index funds such as Vanguard Lifestrategy together with a low cost platform will almost certainly get a better return at every level of risk.

Based on the limited time investigating some of these options, my general impression is that RA has much to offer. My reservations would be whether the RA initial online questions can accurately establish the investors true risk level and secondly I guess it will not be too long before the big banks want a piece of this market and as the customer bears all the risk, there is the possibility of these products being mis-sold...time will tell.


I would be interested to hear if anyone has any experience of using a RA...feel free to leave a comment below.

Tuesday, 1 August 2017

AJ Bell Passive Funds - New Purchase

I have been taking things easy over the past month or so and getting into holiday mode. I enjoyed the two weeks of the tennis and had a small (£1 e/w) wager on Cilic getting to the Wimbledon final so the return from the bookies made up for a rather disappointing men's final. I was also fortunate to back Jordan Spieth to win the golf at Royal Birkdale at good odds before the start so its been a rewarding couple of weeks.

I have also been catching up on reading - just finished 'A Place Called Winter' by Patrick Gale which is based upon actual events from the author's family history and which I can thoroughly recommend.  Secondly I have just started Andrew Craig's best seller 'How to Own the World - A Plain English Guide to Thinking Globally and Investing Wisely'...I will write a review when finished.

As we are in between Test matches, I have time to update on just one new portfolio purchase. Earlier this year I flagged up the range of new passive funds from AJ Bell.

For some time now I have been looking to reinvest some of the cash which has remained on the sidelines following various sales and redemptions. In July, I decided to take advantage of the offer of no platform fees on these funds and purchased the 'moderately cautious' version for my ISA with AJ Bell.

I had been also looking at the Vanguard Lifestrategy 40 as another option but the property element of the AJ Bell fund worked in its favour.

The Fund

This version holds a mix of equities (33%), bonds (52%), property (11%) and cash (4%) via a range of ETFs and passive funds from several providers. It seems to be a mirror image of the moderately adventurous fund which holds 52% in equities and 33% in bonds. Here's a link for the latest factsheet (pdf)...


The equity element is held in :

iShares Core S&P 500 ETF
iShares UK Equity Index Fund
Vanguard Dev. Europe ex UK Fund

The bonds are held via :

SPDR Barclays Sterling Corp. Bond ETF
iShares GBP Corp. Bond ETF
iShares Global High Yield ETF
Vanguard UK Govt. Bond Fund
Vanguard Index-linked Gilt Fund

The property element is :

iShares UK Property ETF

Charges

AJ Bell will not levy their platform charges (0.25%) until 2019 and there are no transaction charges for sale/purchase. Therefore the costs of ownership are merely the ongoing charges of the fund at 0.50 % which includes the charges of the underlying funds/ETFs - these range between 0.07% for the iShares S&P ETF to 0.4% on their Property ETF.

The funds were launched in April and the purchase price was 100.3p - just a tad over the launch price so nothing lost by waiting  few months.

The only option currently on offer is the accumulation fund - I assume they will introduce an income version at some point however as there are no charges for selling units it does not make much of a difference to me.

The price of the Vanguard LS 40 (acc) at the time of this purchase was £158.50 so it will be interesting to compare progress.


Enjoy the rest of the Summer!

Sunday, 2 July 2017

Half Year Personal Portfolio Review

Just time for a brief review before I settle down for my annual tennis-fest! There's not much quality live sport available on Freeview these days. I well remember the many years when life was dominated by work and earning a crust - watching the tennis was limited to the evening highlights and the finals at the weekend.

I really do appreciate now having the time to please myself. Tomorrow I will be off to explore the canals of Cheshire with a few friends.

Following on from my end of 2016 review, I have just reviewed my actual investment portfolios - sipp drawdown and ISA - for the 6m to the end of June.


The Markets

On the markets, the FTSE 100 started the year at 7,142. The index ended the 6m period at 7,312, having pulled back from a high point of 7,550 in May - a gain of  2.4% - if we factor in say 1.8% for dividends paid, this will give a figure of 4.2%  total return for the period.

Of course, the UK listed market makes up less than 10% of the global market place so focussing on just the FTSE 100 for example can give a distorted picture. The total return on world equity markets in GBP terms for the 6m to end June was 6.2%.

Shares

The portfolio of individual shares has reduced from 6 to just 2 following the sale of IMI, Berkeley Group, Amec Foster and IG Group. This leaves just Legal & General and Next which is going through a bad patch and is down 20% since the start of the year.

Fortunately I have had a good run from the other shares and the total return from this sector for the past 6 months is 11.0% which includes dividends received of 1.8% which makes it my best performing section of the portfolio so far.

Investment Trusts

With the exception of Blackrock Commodities, all trusts have provided decent gains over the half year. The better returns came from Aberforth 16%, Finsbury Growth 12%, TR Property 15% and recent addition Scottish Mortgage 16%. In recent weeks I have been gradually reducing my equity holdings and have sold Invesco Income and Dunedin Income trusts and also top-sliced others including Aberforth, Edinburgh, City of London and Finsbury. With an eye on preserving capital I added Capital Gearing to my ISA portfolio in May and have HSBC Global Strategy (cautious) on my watchlist.

Share price total return from my basket of trusts has been a very handy 8.5%.


Scottish Mortgage v Blackrock Commodities 6m to June 2017
(click to enlarge)

Index Funds

Vanguard LifeStrategy 60 is now my largest portfolio holding and, although held in check  by the rise in the value of sterling, it has risen from £164.50 to currently £169.85  - an increase of 3.2%. My UK Equity Income fund has gained 4.5% which includes a half year dividend of 2.3%

The total return for my index funds has been 4.1%.


Fixed Interest

As ever, the bonds and fixed interest sector has provided a steady and predictable income of 3.5% and a total return of 7.5% for the half-year.

My holding in Skipton BS PIBS were redeemed in April and the proceeds are currently in cash.

The Combined Portfolio

Total return for the entire portfolio of shares, investment trusts, index funds and fixed income is 7.9%  which includes income of 2.1%.  

Since the crash of 2008/09, I have had positive returns from my investments and I am hoping this will be another decent year although my expectations are not high. As I posted recently, I am expecting a downturn at some point - maybe later this year or next, I don’t really know. I have reduced my equity holding by around 25% in recent months and will hold the proceeds in cash and await developments in the market.

As ever, I would be interested to hear how others have done over the past 6 months - feel free to leave a comment if you keep track of your portfolio.

Wednesday, 28 June 2017

FCA Look Into Asset Managers

In its final report (pdf over 100 pages) into the UK's financial asset managers, the FCA has raised a number of concerns about the way the industry is failing investors.


Here are a few aspects from the report which may be of interest.

1 The asset management industry plays a vital role in the UK’s economy. Asset managers manage the savings and pensions of millions of people, making decisions for them that will affect their financial wellbeing. The UK’s asset management industry is the second largest in the world, managing around £6.9 trillion of assets. Over £1 trillion is managed for UK retail (individual) investors.

2 The services offered to investors involve searching for return, risk management and administration. The investor bears virtually all the investment risk. There are around 11 million savers with investment products such as stocks and shares ISAs. These investors are willing to put their money at risk to generate potentially greater returns than they can get through cash savings.

3 We find weak price competition in a number of areas of the asset management industry. We confirm our interim finding that there is considerable price clustering on the asset management charge for retail funds, and active charges have remained broadly stable over the last 10 years. We  found high levels of profitability, with average profit margins of 36% for the firms we sampled.

4 We looked at fund performance, and the relationship between price and performance. Our evidence suggests that, on average, both actively managed and passively managed funds did not outperform their own benchmarks after fees. This finding applies for both retail and institutional investors.

5 We looked at whether some investors, when choosing between active funds may choose to invest in funds with higher charges in the expectation of achieving higher future returns. However, our additional analysis suggests that there is no clear relationship between charges and the gross performance of retail active funds in the UK. There is some evidence of a negative relationship between net returns and charges. This suggests that when choosing between active funds investors paying higher prices for funds, on average, achieve worse performance. Similar academic studies of the US mutual fund industry have typically found a negative relationship between fund charges and fund performance.

6 We find that it is difficult for investors to identify outperforming funds.

7 We estimate that there is around £109bn in ‘active’ funds that closely mirror the market which are significantly more expensive than passive funds.

8 There are a significant number of retail investors who are not aware they are paying charges for their asset management services.

9  Our analysis suggests that retail investors do not appear to benefit from economies of scale when pooling their money together through direct – to – consumer platforms.


Having identified some of the problems, investors should not expect any significant changes anytime soon. The FCA are now setting up working groups and further consultations and hope to report back some time later this year. 

They have to consider what impact any changes will have on the attractiveness of the UK as a place to continue ripping off small investors doing business.

I will continue with my low cost index funds and investment trust and my low cost platforms. I would not rely too heavily on the ability of the FCA to give the best deal to the consumer but then I am a cynic!

The best way to keep fund manager on their toes is via competition from the likes of Vanguard as more and more ordinary investors switch from the expensive underperforming actively managed funds into low cost index funds. The FCA can tinker around the edges but I believe the industry will always find ways around whatever changes are brought in.

Leave a comment below if you have any views on this report.