Robo Advisors, ISA and Crypto – A Reader’s Essay

I love it when readers engage with Foxy Monkey content and contribute back. This time, Navjot Singh Walia, an MSc student from Queen Mary University of London asked me to share his essay with my readers.

The quality of the document is very good and I happily agreed.

Without further ado, please grab a cuppa and read the essay. It covers a range of financial topics from Robo Advisors, pros and cons of different ISAs (Stocks & Shares, Cash ISA and Innovative Finance ISA) to a cryptocurrency coins breakdown. Back to Basics!

Robo Advisors

Robo advisor

What are they?

Just steps behind from the cutting edge investments are the ‘Robo Advisors’. In brief,
they are “algorithm driven financial planning services supported by a digital platform
which have little to no human intervention”.

Betterment was one of the first to launch in 2010, having been founded in 2008 following the financial crash. They have now become one of the biggest, with approximately $10 billion assets under management [source].

A Robo Advisor, gathers information from clients, predominantly through basic methods
such as questionnaires or online surveys. This is to understand their financial situation, goals and appetite to risk. In turn, they collate this date to design a ready-made portfolio of
investments.

It removes the high costs that are associated with financial advisors – breaking the
clichéd image of a pin-striped suited Independent Financial Advisor (IFA). Robo-Advisors initial purpose was to rebalance the financial eco-system by giving greater power to those with less wealth.

Since inception, Robo-Advisors have come a long way and they have begun to broaden
the financial products that they offer investors. As of 2015 over $60 billion of assets
were under management and they are predicted to manage over $1 trillion by 2020 and
around $4.6 trillion by 2022.

Foxy Monkey comments: Here in the UK, the most popular one is Nutmeg.
Looking for an Independent Financial Advisor (IFA)? Check out Unbiased.co.uk

Who are Robo Advisors for?

Put simply they are for EVERYONE. As stated by thebalance.com:

“Robo-Advisors can be
a great solution for first-time investors, young professionals who want to put their
portfolio on “automatic”, and for investors that have a relatively simple situation”.

In the past an investor only had two real investment options:

  • Do it yourself (DIY), which involved a lot of research and time and risk involved
  • Financial Advisors, which included high costs and risk of advisors bias to fill up
    their own pockets.

In contrast to financial advisors who are usually for the wealthy, Robo advisors offer
portfolios for as low as £1.
Before you jump into investing with a Robo-Advisor let’s look at some of the pros and
cons.

Drawbacks of investing with a Robo-Advisor

  • Lack of a Personal Touch: Interacting with Robo-Advisors is typically all online
    with no opportunity to speak to an advisor face-to-face. This is a significant
    difference to traditional IFAs. There can also be a perception that due to the scale that Robo-Advisors are looking to achieve you do not get as personalized a
    service as you could with an IFA.
  • Control of your Portfolio Options: Robo-Advisors do not currently let you
    control the investments that are held within your portfolio. This is seen as an
    advantage to many but others like to have greater control over what is in a
    portfolio. There are investment strategies that go beyond algorithms.
  • The false attack on advisors: Fees can range from 0.5% to 2% for different Robo-
    Advisors. Therefore, at the higher end of this fee spectrum, the much-talked-about reduction in fees is not quite as impactful.

Advantages of investing with a Robo-Advisor?

Though with few drawbacks, Robo-Advisors are becoming increasingly popular for some
of the following reasons.

  1. Low Fees: Einstein called compound interest the 8th wonder of the world. The
    impact of compound fees is just as important for investors to understand. Basis
    points of fees compound to make a huge impact over 25 years. The lower fees
    that a Robo will charge is, therefore, a compelling reason to consider investing in
    this way.
  2. Automatic Diversification: The fact that a Robo can easily and quickly offer you a
    well-diversified investment portfolio is a real selling point. In the past, the need
    to find the right mix was either off-putting and time-consuming for DIY investors
    or expensive for those using IFAs or Wealth Managers.
  3. Attracting new investors: Robo-Advisors have encouraged more people to begin
    to invest for the future. Well-designed websites and mobile apps with the
    mentioned lower fees, it has helped the financial advisory market grow
    significantly.

OFF3R is a great place to compare some of the best Robo-Advisors.
But if you believe you are more of Old School, there are other investments with little or
no influence of technology you can look into and are discussed in the following
paragraphs.

ISAs

Stocks and Shares ISA’s

What are they?

ISA stands for Individual Savings Account is a tax-free way to invest or save. Everyone in
the UK over 18 is privileged with ISA allowance of £20,000. This means returns on
investments of up to £20,000 through ISA is tax-free. That could be cash ISA or Stocks and shares ISA or mix of both.

Comparison between Cash ISA and Stocks and Shares ISA

Cash ISA is similar to and has all the features of normal savings account but the interest
earned is tax-free. You can choose from a range of Cash ISA products targeted at
different individual needs such as Instant access: providing more liquidity or Fixed rate-
for lump sum savings.

Stocks and shares ISA on the other hand as the name suggests in the investment in
stocks and shares via ISA and earn tax-free gains. One of the biggest benefits is the
potential returns. They can be higher than cash ISA with low-interest rates prevailing in
the market.

Higher gains never come without higher risks. There is always a possibility of the investment value to go down as well as up or to be at par with the investment made.
There’s another good news for ISA’s investors. With the new inheritance law related to
ISA dictates ISA assets can now be passed on to spouses or civil partners and can still
retain their Tax-free status.

Foxy Monkey: See The Best Stocks & Shares ISA Provider

Lifetime ISA (LISA)

Lifetime ISA is a savings product, designed to help people at two different points in their lifetime:

  • When they want to buy their first house flat
  • When they want to retire

Savers can only open a Lisa if they are between the ages of 18 and 39 inclusive. They can pay up to £4,000 a year, but no more. At the end of the first year, the government will add a 25% bonus, i.e. up to £1,000.

From 2018/19, this bonus will be paid monthly. Since you can continue to pay into a Lisa up until the age of 50, the potential eventual bonus is up to £32,000.
Similar to an ordinary ISA, Lisa money can be invested as cash or in stocks and shares
and is the part of £20,000 ISA limit.

See BBC article: The Lifetime Isa: Free money – or just too complicated?

Off3r is a great place to seek help and lets you compare some of the LISA with minimum
investment of as low as £25 to the maximum limit of £4000.

Innovative Finance ISA (IFISA)

Apart from Cash or Stock and shares, there’s the new form of ISA. Innovative finance ISA
aka IFISA which contains peer-to-peer loans.

Platforms offering IFISA matches us lenders to borrowers who can be an individual,
businesses or property developers.

Money invested in IFISA is the part of £20,000 per year allowance. Off3r really is a good place to look into and compare IFISA offered by various different platforms.

See also:

Cryptocurrency

Introduction

Cryptocurrencies, also known as virtual currencies, have made headlines from the North
to the South Pole. There is much speculation that cryptocurrency, the hot topic of the
modern world will become the ‘money of the future’. Just like how Columbus intended
to find India and discovered America, the story of Bitcoin, the first and foremost
cryptocurrency, is not that different.

The unknown founder Satoshi Nakamoto announced the first release of Bitcoin, a new
electronic cash system that uses a peer-to-peer network to prevent double-spending in
2009.

“It is completely decentralised with no server or central authority. – Satoshi
Nakamoto, 09 January 2009, announcing Bitcoin on Source Forge.”

If only Nakamoto knew what his non-regulated digital peer-to-peer cash system would amount to.

This was not the first time someone tried to create a deregulated virtual currency. There
were many trials in the nineties, such as Digicash. However, Satoshi found the missing
piece when he created Bitcoin – involving the trust element by including miners who
timestamp the transaction in hash nodes.

Moreover, a distributed hash table (DHT) is a class of a decentralized distributed system that provides a lookup service similar to a hash table: (key, value) pairs are stored in a DHT, and any participating node can efficiently retrieve the value associated with a given key. Unlike having a centralised system doing it, it’s the network of peers doing it using Blockchain technology as the support system.

Evolution

Cryptocurrency evolution

Cryptocurrencies have come a long way in the last decade. Though Bitcoin is still the
most popular with roughly 36% of the market share (as of 21 Jan 2018), there are other cryptocurrencies obtaining the limelight and share in the market such as:

  • Ethereum – currency name: Ether has the additional feature of smart contracts
    (Blockchain stored applications for contract negotiation and facilitation using
    ether for peer-to-peer contracts).
  • Iota – unlike Bitcoin, Iota uses a web structure called Tangle which asks anyone
    submitting transactions to verify it by identifying two random transactions
  • Ripple – with the initial purpose to be a payment system, remittance network
    and currency exchange, unlike bitcoin’s peer-to-peer currency protocol.
  • Dash – Following the same concept as Bitcoin but overcoming its weaknesses
    such as instant send, immediate transfer (i.e. within seconds) of currency as
    compared to a minimum of 10 minutes in Bitcoin, Dash also has a new concept of Masternodes, which benefits the users with payments and other transactional
    features and secures the network. A Masternode operator invests 1,000 Dash for
    hosting a Masternode, receives 45% rewards for mining a Dash Block and gets 7
    Dash every month as a reward. [Source].
  • Litecoin: Charlie Lee the creator wanted Litecoin to be the silver of the crypto
    market, with Bitcoin being the gold. In layman’s language, Litecoin mining can be
    done with normal computers, rather than the high spec, performing computers
    required for Bitcoin mining. Other features include less transaction time, simpler
    cryptographic algorithm and 84 million Litecoin as compared to 21 million
    Bitcoin. Whilst, these coins have the most significant market cap, there are approximately 1,400 cryptocurrencies in total, each with their own pros and cons. See coinmarketcap.

Pros & Cons

Growth Drivers

Cryptocurrency has grown exponentially over the past couple of years; here are some of
the reasons why.

  • Decentralised protocols and proof of stake protocol of cryptocurrency solve the
    problem of inflation (in this type of consensus algorithm, instead of investing in
    expensive computer equipment in a race to mine blocks, a “validator” invests in
    the coins of the system).
    Inflation is almost non-existent in the crypto world and
    even the slightest existence is known and the numbers are not hidden. Unlike
    centralised banks where the rate of inflation is not known and banks print the fiat
    without public approval.
  • There are no limits on the amount and the areas where you can send virtual
    currencies, thereby mitigating one of the major drawbacks of fiat currency.
  • There is less transaction time and limited to no fees as compared to SWIFT
    (Society for Worldwide Interbank Financial Telecommunication)/SEPA (Single
    Euro Payments Area).
  • The model is transparent as the network is aware if someone attempts to cheat
    or scam another person, as the ledger is fully auditable and open.
  • No one has the authority to block or freeze a cryptocurrency wallet.

The Other Side

As always, there are two sides to every coin, and cryptocurrencies do not come without
drawbacks.

  • Scalability of cryptocurrency is a concern, as many regions in the world do not
    have sufficiently fast networks and servers to support the currencies.
  • There is still a large number of unknowns with cryptocurrency and it takes time
    to adapt to the change.
  • Regulation of cryptocurrency is happening, notably in China where
    cryptocurrency trading and raising funds through Initial Coin Offerings (ICOs) has
    been banned. However, the rate at which this regulation is occurring still falls
    behind the rapid rate at which the cryptocurrency market is growing.
  • Changing a protocol in a cryptocurrency is another drawback as it is a very long process, but can be improved with community efforts.
  • As in any new asset class, there will always be a risk of price volatility. With the
    price of bitcoin fluctuating from $904 to $14,612 just in the past 12 months,
    reaching a high of $19,343 in December 2017. See coinmarketcap prices.
  • The most concerning drawback to cryptocurrencies is the prevalence of hacks,
    particularly to exchanges, such as the Dao Hack in 2016, creating a risk that you
    could lose everything with no right to compensation.

You can compare and view different cryptocurrencies and their market value and trends
on Crypto Compare and Coinmarketcap.

Read also:

Resources

  1. http://satoshi.nakamotoinstitute.org/emails/cryptography/16/
  2. https://www.hashgains.com/comparison/bitcoin-vs-dash
  3. https://coinmarketcap.com/all/views/all/
  4. https://medium.com/@EthereumRussian/advantages-and-disadvantages-of-cryptocurrencies-187f0aaf83b3
  5. https://www.forbes.com/sites/kenrapoza/2017/10/18/chinas-blockchain-bitcoin-ban-no
  6. match-for-stateless-cryptocurrency-market/#3877910e2de6
  7. https://www.coindesk.com/price/
  8. https://blockgeeks.com/guides/cryptocurrency-hacks/
  9. https://www.fastcompany.com/40449263/the-first-robo-advisor-startup-surpassed-10-billion-in-assets-under-management
    http://uk.businessinsider.com/hsbc-unveils-robo-advisor-plans-2017-11
  10. https://www.thebalance.com/top-robo-advisor-services-4143359
  11. https://moneyfacts.co.uk/guides/isas/inheritance-isas-the new rules/
  12. http://www.bbc.co.uk/news/business-37318001

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