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Robo-advisors in Europe: what investors should know!

Franklin Carneiro da Silva| Updated May 13th, 2022

Over the last years, the US investment industry has seen a huge growth in the adoption of Robo-advisors by retail investors (persons like you and us). This trend is now also seen in Europe, with new startups in the Robo-advisory space being founded in most European countries. 

Want to know what a Robo-advisor really is, its pros and cons, and important information that European investors should be aware of? Just keep on reading!

First things first, what is a Robo-advisor?

In a nutshell, a Robo-advisor is an online platform where you can easily open an investment account and choose an appropriate investment portfolio without speaking to a human. In theory, this portfolio is built according to your financial goals and risk profile.

In essence, a Robo-advisor tries to mimic what a human financial advisor would do through technology. Because the processes are automated, their fees tend to be low compared with most mutual funds and wealth management firms.

In practice, how does it work?

Generally, investing through a Robo-advisor work like this:

  1. You open an account in a Robo-advisor and start by answering some questions, like your age, risk tolerance questionnaire, etc.
  2. Next, you are generally recommended an optimal investment portfolio, which you can personalize to fit your preferences.
  3. Finally, over time, the Robo-advisor will adapt and manage your investment portfolio – rebalance it periodically, to make sure it’s properly diversified. Other functions include automatic payments and tax loss harvesting.

Take a look at a quick 1-min explainer video from Wealthfront, a leading US-based Robo-advisor:

What are the fees charged?

Depends from company to company. But normally, investors are charged an annual fee (generally less than 1%), plus the underlying investment products’ fees (such as ETFs’ fees).

Compared with most mutual funds and wealth management firms, most Robo-advisors are more affordable.

Why are US-based Robo-advisors so cheap when compared with European peers? Is Europe inhibiting financial innovation?

In the US, Robo-advisors are, in fact, much cheaper and more developed when compared with the current European alternatives. There, you will find some Robo-advisors that charge annual fees of 0%. In Europe, most fintech charge 0,5% to 1% annual fees.

However, that doesn’t mean that Europe is inhibiting financial innovation. The reality is that the European market, on the one hand, is much less competitive than the US market, and, on the other hand, European investors still show an issue of trust with automated investment (a human financial advisor is a norm yet). Besides, the European market comprises many different countries with different languages, tax systems, financial regulations, etc. 

All of this contributes to the fact of the market for Robo-advisors here in Europe being smaller. As the native solutions can’t benefit from the same economies of scale that the US-based peers do, they end up being more expensive or offer a not-so-good product. 

Should you still use a Robo-advisor for your personal savings?

Well, it depends. There is no way to predict the future, and so there is no correct answer for that. 

Robo-advisors target small, long-term investors who don’t want to spend time managing their investments and don’t know their profiles. They are the so-called “fast-food of investments”, – offering an easy and convenient way to build your diversified and passive investment portfolio.

Some alternatives that you might also be interested in include:

  • Working with a traditional advisor: generally requires having a considerable amount of money to invest;
  • Do-it-yourself investing: autonomously make and manage your investments.

How to choose the best Robo-advisor?

  • Look at the investment strategy: where and how they will invest your money. Some Robo-advisors belong to a specific financial institution and might try to “sell” their own investment products through the Robo-advisor, often with high fees associated. Make sure that it’s an independent, low-cost, and transparent service;
  • Human advice: you might want to check if they offer human personalized advice if needed;
  • The fees charged: make sure to separate what is charged by the entity selling you the service and the costs associated with the products themselves (e.g. ETFs) that do not go to your Robo-advisor’s pocket. Example: ETFmatic charges “0.48% + TER”. It only earns the annual fee of 0.48%; the ETF providers control the TER;
  • The regulatory bodies: make sure that top-tier institutions properly regulate these services. These can provide some safety if the Robo-advisor goes bust by offering investment protection and making sure that they conduct serious business.
  • Taxes are essential: because of the different tax systems, it is hard for a Robo-advisor to have an investment strategy that suits all European countries. You should investigate if the investment strategy behind the Robo-advisor is optimal in your country’s tax system. Otherwise, it can eat your profits. For example, most Robo-advisors in Europe invest in distributing ETFs – which are not tax-efficient in countries like Portugal (accumulating ETFs are preferred for tax purposes). Other examples include having ISA accounts (UK). Finally, some Robo-advisors use tax-loss harvesting to help optimize your tax costs.

If you’re interested, take a look at our list of Robo-advisors available by country, as well as our individual reviews.

The bottom line

Robo-advisors are a nice option for any small investor who isn’t really comfortable trading in an online broker and who wants to set it and forget it without worrying about the fees. This can avoid being trapped by a scammy broker or making dumb investment decisions without the proper knowledge and research and driven by emotions.

In any other case, we believe that, with the amount of information available online, investors more than ever have the option to invest by themselves and save these fees that can add up in the long term. We highly believe that using a Robo-advisor is certainly better than doing nothing. However, we also consider the low likelihood of outperforming DIY (do-it-yourself investing). All in all, if you are the kind of person that wants to delegate your investment decisions, a Robo-advisor is the way to go!

Let us know what you think in the comments below! 🙂