Chris Hancock

What are the benefits of robo-investing?




This is the dawn of an exciting new era. Recent developments in artificial intelligence (AI) and robotics are primed to revolutionise the way we make decisions and transact in the digital economy.

The government’s round table on robotics and AI, held last October, indicates that this is now something being taken seriously from a policy perspective and as a means to support the economy. 

One of the areas in which this is already making an impact is financial services. A recent survey by Accenture, which polled 32,000 consumers globally, revealed that nearly seven out of 10 customers would be willing to take robo-advice for banking, insurance and financial advisory services.

The banking system is broken

These results are not surprising. The last decade, with the collapse of Lehman Brothers, has revealed that not even the big banks are immune from the fallout of the financial crisis.

Additionally, the Libor and PPI mis-selling scandals made the banks fall even further out of favour with the public.

Why robo-investing is a timely solution 

Consumers and savers are increasingly expected to make decisions for themselves. 

A recent example of this is pension freedom, introduced by the government in April 2015. This allows people who are 55 and over to draw out their entire pension as a lump sum. While individuals are encouraged to take advice around this transaction, there is no obligation to do so.

Correspondingly, reforms to the state pension indicate that citizens will have to work longer and save more for their futures. 

Innovations in technology

However, the rapid development of technology and proliferation of broadband now also mean that consumers have the ability to individually transact in every area of their lives, while they are on the move, via smart phone and tablet devices.

These choices allow for discerning individuals to tailor services and products to their exact requirements. Common examples of this include switching energy and selecting bespoke bundled broadband and television packages. 

The rise of peer-to-peer finance was the next step in the evolution of consumer choice, and robo-investing has the potential to take this mainstream and to increasingly help individuals take responsibility for their financial futures. 

What is robo-investing?

Robo-investing is the term used to describe algorithms and automation (powered AI) which execute financial decisions on behalf of investors.

Ultimately it is individuals who are setting the criteria behind the decisions, and it is the technology executing on their behalf. 

Benefits

Beneficiaries of this include cash-rich, time-poor investors, who will be able to grow their net worth without having to actively manage their portfolio.

In the case of Crowd2Fund’s Smart-Invest, investors are able to set their lending criteria based on preferences, risk appetite and goals. Smart-Invest then allocates funds on these preferences and reallocates them on the same criteria when the loans are paid back.

While investors will still have to consider risk, making such decisions through an AI system is better value than engaging with financial advisers, who are expensive and tend to only market their services to high-net-worth individuals. 

Better returns with tax-efficient investing

Robo-investing can also provide better overall returns than by investing with a fund manager, who take an element of fees through a percentage value of the overall investment. Over time this can have a detrimental effect on a portfolio’s value due to missing out on the lost opportunity from the recurring interest. 

The effectiveness of robo-investing is enhanced further if funds are held in an Isa. This allows funds to be able to grow tax-free. 

A handful of products allowing savers to do this with a tracker fund have been on the market for a couple of years, with Crowd2Fund’s Smart-Invest IFIsa being a new development for the 2016/17 tax year.

Pictured Chris Hancock, CEO of Crowd2Fund

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