The Financial Conduct Authority criticised automated advice and online discretionary managers last month over suitability failings and charges. Selin Bucak, who has invested money with five robo advisers, Nutmeg, Moola, Wealthify, Moneyfarm and Wealthsimple, has decided to review the companies from the perspective of an individual investor, with one question on her mind: was the FCA right?
When I first started investing money into robo-advisers, I showed the results of my risk profile and asset allocation to our head of investment research Frank Talbot. After looking through the original four (Nutmeg, Moola, Wealthify and Moneyfarm) this is what Frank said on Moneyfarm: ‘I feel like we’ve finally hit upon a suitable asset allocation for someone of Selin’s age and attitude to risk. That doesn’t mean she isn’t massively exposed to a pullback in global markets – but at least it makes sense given her investment horizon.’
Moneyfarm has six risk categories and after filling out the initial questionnaire, which had a total of 11 questions to determine risk appetite, knowledge and experience, and financial situation, I came out as adventurous, which is a level five. So far this has served me well, with my investment of £1,450 up 3.87% since 8 June 2017.
Considering that Moneyfarm is the only firm that put me in a higher risk bracket, I had a question for them: Why did I come out as adventurous?
Here is what they told me: ‘Answers given suggested that she had a good understanding about the risk/return relationship. The score was quite high and so this didn’t reduce her risk level in any way. Answers given also show a strong understanding of ETFs and FX, which meant the score didn’t constrain her.
‘Her financial position is fairly strong, so this hasn’t constrained her, we have considered the proportion of her assets she has invested with us and her current level of income.
‘To identify the final portfolio, its timeframe and chosen risk level – both count as medium which means she has the portfolio 5 against her investor level 5 (adventurous).’
Chief executive officer Giovanni Dapra (pictured) was confident that I had been put in the right portfolio. ‘Looking at the details of your knowledge, I think we got it right,’ he said.
‘We think it is one of the key parameters for a person’s ability to select a strategy. Your ability to understand the context of how the markets move. We see that every time, when we have customers coming from [holding] cash, with no experience in investing, they are much more likely to make mistakes when there is volatility. Knowledge is important.’
Focus on knowledge
This focus on knowledge is clear from Moneyfarm’s questionnaire, which has five questions on knowledge and experience.
All good, but how does the firm ensure ongoing suitability?
Last month, the company introduced the Advice Centre, a feature that aims to make it easier for investors to get continuous investment advice.
It shows current investor profiles and recommended portfolios and will notify an investor if it is thought that they need to make a change.
Although I have not had this yet, the Advice Centre will also prompt clients to take the Mifid II questionnaire annually, I was told. Every six months clients are able to edit details of their portfolios – for example if they want to adjust the time horizon for their investments.
Dapra adds that as a firm, Moneyfarm wants advice to be a core part of what it does, believing that that’s where the value is. That is why the firm, aside from implementing features such as the Advice Centre, is also looking at ways to expand the level of advice it provides.
It is worth noting that Moneyfarm was one of the firms that participated in the FCA’s review.
On charges disclosure, I don’t think any of the robo-advisers I am invested with have many issues. Fees are clearly shown depending on how much is invested, as well as what the average ETF cost will be in addition to the management charge. Moneyfarm is no exception.
But Dapra’s view on how fees need to be presented is interesting. He believes that sometimes, ‘what the FCA thinks is the most transparent, is not the most transparent way’ when what the customer understands is taken into account.
‘We have to provide context for our fees otherwise the customer will understand something different and make a decisions he or she wouldn’t have done otherwise. It is critical to do something that a normal person is able to compare.’