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Suitability soup: an insider’s view on robos

Suitability soup: an insider’s view on robos

Five online wealth managers are pitted against each other as Selin Bucak invests money and compares their services. Nutmeg, Moola, Wealthify, Moneyfarm and newcomer Wealthsimple have all put her in different risk buckets, from cautious to adventurous. Here, she chronicles her experiences.

The Financial Conduct Authority hit out at automated advice and online discretionary investment managers over suitability failings and unclear charges last week, and I’m not surprised.

Considering that when I first started this exercise of investing £10,000 into different robo advisers a year ago, I was placed into three different risk brackets, the suitability warning piqued my interest.

Why was I put into a cautious portfolio in one place (Moola), balanced in two (Nutmeg & Wealthify) and adventurous in another (Moneyfarm)? The fifth company I invested in a few months after, Wealthsimple, placed me in a growth portfolio.

Does this mean I should trust those three over the others?

When I started filling out the questionnaires that help determine my risk profile, I recorded my answers and therefore know that there is little difference in how I responded. However, the difference was in the questions asked by the companies to determine my attitude to risk and capacity for loss.

For example Moola, where I seem to have the most aversion to loss, had a feature that I liked at the start, but now it makes me question the effectiveness of it: the dice game. When I participated in the dice game, there was one phrase constantly on my mind: I don’t know!

If I have the chance to win £110 but also lose £40, would I risk it? I don’t know, it depends.

It depends on my mindset at the time, it depends on the situation and what I need the money for. If it was at the start of the month, yes I would risk it, but at the end, that £40 could take me a long way.

How can online investment managers really ask the right questions to determine attitude to risk and capacity for loss when it took face-to-face wealth managers years to get suitability right?

With all these questions in mind, I decided to assess how my robos have been doing, starting with Nutmeg, (the other four will be covered in following articles). 

Nutmeg had a pleasant surprise for me. Since it is coming up to a year since I invested, the company contacted me to check my information was still up to date and to reassess the suitability of my investment. I answered all the questions and although I was kept in the same portfolio, my attitude to risk moved up slightly higher than before, from medium to medium – high. This is the right conclusion I thought, since I have grown more confident over the last year as I continue investing.

This apparently is an ongoing exercise and has been in place for a number of years, with the head of financial advice Lisa Caplan involved in the process, Nutmeg told me.

I like this approach. Of course robos should check in with clients, just as other wealth managers do. Now, I’m not saying that
Nutmeg has got this down 100%, but it has made good progress. However, I am still concerned that filling out forms with static questions puts too much faith in the consumer’s knowledge of themselves and what they consider to be enough financial experience.

Now onto charges. I always thought Nutmeg was actually quite clear on these and going back in to check, I was right. Nutmeg has a fees page which shows clients an expectation of what the fees will be, depending on the amount invested.

However, the company did tell me that it added a more detailed costs and charges section to ensure it was fully Mifid II compliant in January, even putting in some extras that were not required by the regulation.

The breakdown now takes into account:

• The individual’s investment style (fully managed or fixed allocation)

• The individual’s selected risk level

• Contribution levels

• The impact of inflation for pension customers

• The chosen length of your investment

• Expected returns over the life of your investment

• The reduction in Nutmeg’s fee when your investment goes above £100,000

• The individual fund costs and impact of market spread for each individual risk model

One last question

Considering the management fees are quite low, I wanted to ask Nutmeg: how do you reduce costs?

A spokesperson told me: ‘We reduce the costs of our portfolios in a number of ways. First, we dedicate significant resources to ETF research, meaning we can be confident we are using the most cost-effective ways of implementing our investment strategy, even if the product used doesn’t have the lowest expense ratio (we look at total cost of ownership – the performance our clients are delivered after all fees).

‘Second, we use innovative technology to our clients benefit when trading – we have an in-house trading team that typically transacts our ETFs ‘over the counter’ with specialist market makers (rather than on the stock exchange) in order to achieve better prices for clients. As a discretionary investment manager, we are also able to match trades to reduce the volume traded in the market.’

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