Some have called robo advisors the Uber of wealth management. Uber transformed an existing service to meet the needs of a convenience-hungry generation. Similarly, the introduction of robo advisors into the wealth management industry has disrupted the way business is done by offering a convenient, online and cost-effective way to invest for a digital-savvy generation.
In the wake of the 2008 economic crisis, robo advisors (or automated investment services) were born. Early robos were simple. They were designed to rebalance investor assets within target-date funds while giving their users a modern, sleek and online interface at a lower cost. But then they became so much more. On top of adding services like tax-loss harvesting and automatic rebalancing, robos began to diversify. The catalog of automated investment services available today is far more dynamic and intricate than it was at its genesis. While the fate of robo advisors is yet to be known, what is certain is that their capabilities are expanding and investors continue to turn to them for their financial planning needs.
The biggest achievement robos have on their mantel is the business of millennial investors. Millennial investors have, not surprisingly, flocked to robo advisors’ convenience, sleek online design, simplicity and affordability. According to recent surveys, only 16 percent of millennials work with a financial advisor. Just as baby boomers are making their way into retirement, many millennials are now in the financial position to invest, and it’s time for wealth management firms to jump on the opportunity.
However, it’s not just the Millennials and other younger generations who prefer digital investment tools. A recent E*Trade Streetwise study shows that in all three age groups of 25-34, 35-55 and 55+, the majority prefer some level of robo or digital toolkits combined with personal advice.
For online brokers, robo advising feels like a natural extension of what was already an electronic service. Stock brokers went through a massive transformation in the late nineties during the first dot com boom and most, if not all, became online brokers. More interesting is the level of interest in robo advisors from very traditional players such as insurance companies, asset managers and wealth management firms. These firms are aggressively moving to build, buy and partner with robo technologies.
So would you be better off ditching your pricey human adviser for a cheaper computer solution? The answer depends on a variety of factors, including your financial circumstances, reaction to risk, and comfort level with recently developed technology. So consider the following factors below to help you decide which option best suits your situation.
The size of your portfolio. If your total savings is less than six figures, it probably isn’t worth paying for a human adviser. Robos’ low minimums make them the appropriate option for investors with smaller portfolios, or for those who are just starting out.
Your overall financial situation. Even human advisers agree that for setting up a basic, diversified portfolio, it’s tough to beat the low cost of a robo-adviser. But there’s a natural evolution where life goes from being somewhat simple to more complicated. If you’re trying to decide among several financial goals, or your financial plans involve one or several other people (such as a spouse or aging parents), you may need to talk to someone who can run the numbers on several different scenarios.
Your prior track record. Did you freak out during the bear market of 2008 and pull out of stocks? If so, keep in mind that it’s pretty easy to bail out of a robo-portfolio with just a few clicks. If you tend to get very anxious about market drops, you may benefit from the ability to reach a knowledgeable person who knows you on the phone.
- WealthManagement.com: “The Uberization of Wealth Management”, Mike Gardner, 2016,<http://wealthmanagement .com/practice-management/uberization-wealth-mana gement?page=1>;
- Forbes: “The great fintech robo-adviser race”, 2016, <http://www.forbes.com/sites/falgunidesai/2016/07/31/the-great-fintech-robo-adviser-race/#2eea2e9d3812>;
- Consumer Reports: “The rise of the robo-adviser”, Cybele Weisser, 2016, <http://www.consumerreports.org/persona l-investing/rise-of-the-robo-adviser/>.