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Robo-Advisors Are Becoming Increasingly Popular. Will They Ever Be Able To Take...
17 Jan 2022

Robots want to be your next financial advisor.

Not too long ago, that notion may have smacked of sci-fi whimsy — “Star Wars” cyborg C-3PO in a power suit on Wall Street, perhaps.

But robots, or so-called “Robo-advisors,” may soon manage more than $1 trillion of Americans’ wealth.

These aren’t actually tangible robots; they’re algorithms companies have developed to automate digital investing. Plug some details (age, savings goals, risk comfort) into a computer or phone app and the algorithm assembles and manages a personalized investment portfolio just for you.

But is a Robo-advisor right for all investors? Is a human better equipped for the task of money management and financial planning?

“It’s suitable for some people and not for others,” Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, D.C., said of Robo-advisors. “If you play golf, it’s just a different golf club.

“Sometimes I use my 7-iron and sometimes I don’t — it just depends on where I am.”


They’re Everywhere

Robo-advisors for the everyday investor began popping up around 2008, the year after the iPhone made its public debut.   

Just over a decade later, Robo-advisors were managing about $785 billion, according to Backend Benchmarking, which specializes in research on digital advisors.

Dozens of firms have built their own models to capitalize on the popularity and an ascendant digital culture.

Robo-advising to become a $1.2 trillion industry by 2024, analysts predict.

They include independent shops like Betterment, Personal Capital and Wealthfront; traditional Wall Street brokerages like Fidelity Investments, Merrill Lynch and Morgan Stanley; and those like Financial Engines that cater to 401(k) plan investors.

Established players that have historically focused on an older, wealthier client base can also leverage the technology to court a new class of younger investors, who’ve shown an enthusiasm for the digital financial realm via online stock trading apps like Robinhood and for assets like cryptocurrency.  

“They’re everywhere now,” David Goldstone, research and analytics manager at Backend Benchmarking, said of Robo-advisors. “Just about every major bank and discount broker launched one in the past decade.”


Who’s a good candidate?

Robots tend to be especially well-suited to newer investors who haven’t yet built much wealth, and who would like to outsource money management to a professional for a reasonably low cost, according to industry experts.

For one, Robo-advisors offer a low barrier to entry, due to low or nonexistent account minimums.

It’s perhaps unsurprising that the average Robo user skews younger. For example, about 90% of the 470,000 clients at Wealthfront are under 40, said Elly Stolnitz, a company spokeswoman. Their average balance is about $60,000.

That demographic trend is also a function of a greater digital affinity among millennials and Generation Z, who largely grew up as digital natives and may be more attracted to a Robo service as a result.

But age and wealth aren’t the only factors at play, he said. The company has clients in their 60s and 70s with multimillion-dollar portfolios; the oldest user is over 90.

“I think it attracts people who want to delegate away management of their portfolio,” One market expert said.

Fees for that management are typically much lower than for a traditional financial advisor charging 1% a year on client assets. The typical Robo charges 0.25% to 0.35% annually for their advice service — about a fourth of the cost.

In dollar terms, that means an investor with $100,000 would pay the typical human $1,000 a year for their services, and $250 to the average Robo. (Of course, not all human advisors charge a 1% fee. Some have shifted to monthly subscription fees or one-time consultation fees, for example.)

Investments in the portfolio — often low-cost index mutual funds or exchange-traded funds — do carry an additional fee. Some firms invest clients in their name-brand funds, which boosts their revenue via fund fees. They may also levy higher account minimums or fees for tiered service levels.



Using a purely digital service may come with trade-offs.

While digital services do a good job of automating important investment functions (fund choice, the stock-bond-cash mix, and regular portfolio rebalancing, for example), human advisors lament the relative inability of algorithmic programs to talk clients through situations on demand.

Those may include the reasoning behind a specific strategy recommendation, or handholding in daunting times like job loss or a cratering stock market.

Financial planners also believe they’re better suited for proactivity and delving into the needs of some clients beyond money management — whether tax, estate or business planning, which may prove too complex or nuanced for an online questionnaire, for example.

“We do a lot more than just investing,” said a senior Wealth Manager.

Helping a client choose whether to exercise stock options, buy long-term-care or liability insurance, or set up a business as an LLC or another type of entity are likely beyond the scope of a digital advisor, he said.

It’s also a challenge to automate client psychology.

The online questionnaires Robo-advisors use to determine the best portfolio for a client can’t probe answers and body language in the same way a human advisor might.

Even determining what makes a client happy — in essence, the purpose behind their money — may be beyond the scope of Robots, according to some experts.

Financial advisors can ask follow-up questions to fill out a picture and understand.

The Securities and Exchange Commission, which conducted a recent review of Robo-advice services, also questioned whether they always recommended appropriate portfolios given clients’ stated risk tolerance. (The agency didn’t name specific firms it examined.)

Of course, not all human advisors are necessarily performing these functions appropriately, either. Some may purely manage client investments, without assessing goals or other complex financial-planning details — and in this case, clients might get more value from a Robo-advice relationship.

“I think there is value humans provide,” said one senior manager of financial planning. “But on the investment side, I think Robots have a huge advantage in being cost-efficient.”



Robo platforms have also evolved to account for some criticisms and cater to a broader pool of investors.

For one, many have expanded to offer more intricate levels of “goals-based” planning; they can assemble investment and saving recommendations based on short- and long-term goals like saving for a home, vacation, college fund or retirement.

Many now offer a “hybrid” offering that provides access to one-off interactions with a financial planner or even an ongoing relationship with a human advisor.

Ultimately, whether a robot or a human manages your money it comes down to what an investor wants from the relationship.

A financial market expert said, “I think Robo-advisors are good — it gives investors more options, I’d hate a world where people could only invest one way.”