What's up you guys, sasha here and today i want to talk about a topic that is becoming incredibly popular in the industry. I'm going to talk about robo advices, it's something that a lot of people talk about. There's a lot of misconceptions, a lot of facts and names and words thrown out there. Some of them are just not true, so i just want to go and bust.

A few myths explain exactly what they are explain exactly some things that i really don't like about them and some things that i think might work for some people and tell you what i think about them. So, let's get right into it. First, let me just tell you a brief history. Now, robo advisors have sort of sprung up in the last five to six years and become a way for people to invest their money in a relatively passive way that somehow optimizes their investments for their particular needs and wants.

Now i remember when i was first starting doing consulting and i began going around all the different conferences to do with fintech and to do with banking around the world, and i went to all these different big events in san francisco and london and all these different Locations and at these events, i saw all of these different little startups begin to talk about this robo advisor business, and i really didn't like some of the things they were saying and let me tell you exactly what those things were, because they're still exactly the same Things they're saying today the way a robo advisor works is it actually goes and asks the person who's doing the investments, a bunch of relatively simple, straightforward questions. They ask them about their particular life situation, what they want from their investment portfolio, how long they want to have their money in there what they want to achieve all of those types of things, and on the back of that, they go and try to advise or Suggest a particular investment strategy and the way it's explained is this people say well the exact person who's doing the trading doesn't really understand things like candlestick graphs. They don't understand how different portfolios work. They don't understand how different funds work.

They don't understand how risk works. They don't really understand the things they're investing in, so what we'll do is we'll make it really easy will allow them to invest in all of those things without understanding what they're investing into - and this sounds absolutely great on the surface. But after about five minutes of sitting there, thinking about it, you might be right to think hang on. Is this thing genuinely advising people to go and invest large amounts of money in things they fundamentally do not understand, because some system has asked them a few questions and that's somehow meant to make it okay, and i have a massive problem with this.

I have a massive problem with people investing money in things that they don't fundamentally understand in things that they haven't comprehended in terms of what the actual level of risk is, how the system they're investing money into actually works, there's so many issues and cases over time. When people began investing money into things, they didn't understand because they promised great returns, they promised that it would be better than the general stock market. There was all these advantages and, although robo advisors are not generally one of those things, so many of these come out to be scams, pyramid schemes, whatever you don't want to invest in something unless you actually understand what it is you're investing into. If you don't understand it, my personal advice - and this is not financial advice.

But my personal advice is that people should learn and should educate themselves on what it is they're putting their money into, because otherwise you're just basically throwing it out and hoping for something from something. You don't understand to return you some kind of return. I mean i don't understand why somebody would actively advise it, and i also don't understand why there isn't legislation that basically should prohibit this type of activity, because it is genuinely a very bad piece of advice to tell people that they should invest in things. They fundamentally.

Don't understand now just to complete my disclaimer. I am not a financial advisor, i don't know your personal situation, so i'm going to tell you what you should and should invest into. This is just my personal opinion about robo advisors and general investment strategy. I have a very strong view that people should be smart with their money.

They should really understand what it is they're doing. They shouldn't just go and plunk it into things that are fashionable or trendy or because somebody at work says something and it ignited their interest. You should really go and do your homework. You should really understand what the underlying principles or whatever you're investing into are, and what the full spectrum of risks and benefits are before making any of those decisions.

Now, let's just break a few myths, a robo advisor is not a robot. It is not driven by artificial intelligence. No matter what these different websites say, no matter what it is that they're trying to make you believe, no matter what the marketing lingo they put in front of you is not a single one of these accounts is driven by an actual ai algorithm. Now i'm talking not just as an investor or somebody who knows a lot about these companies or somebody who works in the financial services industry.

I also talked to you as somebody who studied math at university and somebody who specifically studied some of the modeling behind some of the latest artificial intelligence trends well latest. As of whenever i went to university, i i know a thing or two about how these types of systems would be orchestrated and built, and i can tell you very very straightforwardly that none of them use anything even closely resembling to something that would actually be called Artificial intelligence by anybody who builds those types of systems - it is not even something that is particularly sophisticated. There is an algorithm, and the algorithm asks a bunch of questions so that everyone's starting at the top of a tree goes through a bunch of different branches. Based on the answers that you give and you end up in the bottom being in one of the nodes which essentially determines the strategy that should be applied to you and that number of nodes is usually not very high, there's usually just a small number of different Groups of people that you get segmented into based on your age, your investment wants, based on the risk that you're happy to take and that basically just determines the mix of the different funds and stocks that are going to be invested on your behalf.

It is pretty much as straightforward as that now one of the big things in the way that these accounts are marketed as they're saying this is the same or similar to having and a human actually advising you and where to invest your money, some kind of a Personal financial advisor, but it doesn't have the human element to it so essentially they're still giving you this personalized advice, but at a much lower cost because you don't have to have the person dedicating their time to doing it. So that means that the costs are also lower, so i've written them down over here so nutmeg, which is a big big company, maybe the leader in the uk in these types of accounts they charge 0.75 percent for amounts of up to 100 000 pounds, but remember That there's going to be other costs on top, so on top of the fee that they charge, the money that gets invested on your behalf in the various funds will also typically attract the various funds fees as well. They can be as high as 0.5 percent. In some cases, even higher.

The majority are probably going to be around the 0.2 to 9.3 percent and there's other factors involved as well. So you might lose money on spread because you're making other people make investment decisions on your behalf. You might lose money on exchange rate fluctuations depending on how the money is entered and drawn out of these different investments. There's a lot of other things.

You probably won't really care about too much and it probably won't be significant, but as a whole, it might add up to more than you might think. If you look at some of the other providers just to compare so well simple, also in the uk. As of relatively recently, charges not point, seven percent for amounts of two hundred thousand money farm charges not point seven five percent for amounts under ten thousand in the us. The situation is a little bit better because these companies have been about for a much longer time and they've had to compete to a much greater degree than they have had in the uk.

Generally, the fees are a bit lower, so companies like betterment, wealthfront and other ones in the us generally charge somewhere around the 0.25 mark instead of the higher fees charge in the uk. Hopefully, what this means is, as this industry grows and as the competition gets hotter, these fees will also reduce in the uk as well. But here is the big problem that i have with it. If you're targeting something like six to seven percent returns on your investment portfolio over time and that's probably on average reasonable, if you account all the ups and downs over many decades.

So, if that's what you're, targeting and you're then having to spend 0.75 on the fee and another 0.2 0.3 on the funds that these fees are allowing you to invest into suddenly you're paying something like one percent out of the seven percent that you might be returning. Just in fees alone, and when you add the taxes on top the taxes, remember don't care about the fees that you're paying they care about the individual dividends that are being paid. They care about the appreciation of the various stocks that you buy and sell. So when you account for those taxes as well, suddenly the returns that you're making are much much lower than you actually anticipated.

You generally have three broad options available to you, where you can invest money that is not going to go through a robo advisor where you can make the same, or maybe more return without having to pay the very, very high fees. In my personal opinion, these fees are extremely extremely expensive for just a basic algorithm that determines the mix of the different stocks and shares that are going to be bought on your behalf. For example, you can go and do the investments yourself. This is not for everybody.

It carries generally a much higher risk and most people probably actually lose money compared to just investing in relatively safe index funds or something else like that. Where there's an aggregated balance portfolio, but you can go and buy stocks and shares yourself, you can go and decide the portfolio that you want to invest in. You can go and buy the individual stocks and mix that portfolio and manage it over time, and you can do that for free with trading two one. Two, i'm going to put a link below where you can get a free share.

If you sign up using that link, if you're interested, if you can do it for a small fee with other providers or very very small annual management fees, it's generally going to be much much cheaper to do it. That way, you can also through the same way through the same platforms going by etfs or index funds, or anything else like that and, generally speaking, those are also free or have a very, very low management cost. If you want to invest in some kind of an actively managed fund, you can also do that at a much lower cost than paying for a robo advisor. So you can go and pick a fund that works for the types of investments that you enjoy.

The basic investment strategy on the risk levels and the return levels people are happy with and you can go and pick those funds and pay considerably less money than going through. The robo advisories, for example, vanguard uk charges 0.15 per year, plus the same 0.2 percent cost of the actual funds that that fund invests into hargreaves lands down is 0.45 up to 250 000. Now those are more expensive than the do-it-yourself options, but they're still less than half the cost or about half the cost of doing exactly the same thing with a robo advisor. So i would wager that you would probably do as well by investing in one of these systems and spending the five minutes deciding which fund to go in then going down the route of actually going in letting a node-based algorithm make the decision for you generally.

I have a big issue with the amount of information that is actually provided to customers who are investing money into these robo advices. There is almost no science explained behind how they work, there's almost no information given as to how they make those decisions. On your behalf. Exactly how many nodes are there at the bottom, exactly what the strategy is going to be for you that is going to be used to make the investments on your behalf? The information is so lackluster.

There is so little actually explained that you have no real way of comparing investing in one of these accounts versus buying a fund or doing the stuff yourself whatever it is. There is generally so little information that i don't like the lack of transparency to the point where i would basically say to a friend if they were asking me that i wouldn't put my money into it, because i don't understand what they're going to be doing with It and they're not going to tell me, although a lot of investment companies will say that robots and ai and technology and computers are making all these investment decisions. Ultimately, there's still going to be a huge amount of human oversight behind it, whatever they say, they're still going to be humans, they're going to be affecting what happens with these investments. Nutmeg that i mentioned earlier actually go and say that there are people that actually oversee and actively adjust the way that this robo advisor process works and the way that these funds are invested into.

Wealthify say that everything is automated, but the automated systems that go and manage these accounts still have to be created by humans, the algorithms that decide where money goes into has to be created by humans when they are adjusted, improved and managed over time. Those algorithms are adjusted and improved by humans so because this is ongoing thing, because these algorithms continuously change and improve. Ultimately, it's not the algorithm itself. It's still the people behind them to decide how the algorithm works, what it does and how it manages those funds.

So, just so that we're clear it is not some kind of super smart computer the go and sits there and decides its own strategy based on a super complex analysis of the world's trading and investment market. It is still ultimately driven by people now. Having said all that, i still think that these types of robo-advisor funds might still actually be quite useful for some people, if you're particularly nervous about investing if you're really really uncertain. And what you don't want to do is to put all your money into one thing and then let that one thing play out over the long period.

Let's say you want to invest in a fund, but you're just not sure is that fund gon na underperform overperform. What if that fund performance changes over time, you are so nervous and so unsure that you don't want to actually monitor the situation and move your money from that fund to some other fund, because you're not sure if you do it at the wrong time, if you're, Not sure if you're going to do it at the bottom of the market or whatever else, if you want somebody to essentially be making those decisions for you. If you want the certainty that there is a company that optimizes the flow of money between the different funds and the investment strategies, and all of that continuously without you ever having to do anything in those cases, i do think that robo advisors could work if you're Very uncertain about investments, but you do want to have some of your money in stocks and shares if you don't want to ever understand exactly how these different things work, and you just have no appetite for it. But you want to have your money sitting and earning interest and earning dividend yields and earning whatever it is through a combination of these different accounts.

Then this could actually be the right thing for you. What i'm saying is, if you're a sophisticated investor, if you're a part-time, if you just have any kind of interest in managing your money over time, this robo advisor option is quite expensive to a number of different options available to you. So for a lot of people. I don't think there would be the right type of account to go for.

In fact, if you're watching this video, the likelihood is, you are more actively engaged and more actively interested in investments than the average person, and that is why i'm saying that, for a lot of these types of people, i think putting the money into something like a Robo investor is probably not going to be the right decision, the fact that you're dedicating time to actually learn and hear other people's opinions and try to educate yourself about how these different things work, probably means that you have the means to go and manage and optimize. Your investment portfolio over time without having to go and spend the money on those expensive annual management fees with a robo advisor. I hope you guys found this interesting if you strongly disagree with what i've just said, if you have a very different opinion, i would really love you to go and write a comment below no matter what it is that you have to say. Please go and comment.

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