Robo Advisors Don’t Spell the End of Asset Management
You may have heard the term robo-advisor being tossed around. If you’re an asset manager, the term may be making you nervous. After all, the perennial fear about technology is that will inevitably take your job. However, this may not necessarily be the case with robo-advisors, ominous though they may sound. In fact, they may be providing an opportunity for people who have never been able to easily invest previously.
First things first – what is a robo-advisor?
A robo-advisor is an automated investing service that provides a method for asset management that doesn’t involve meeting with a human advisor. While its name implies a digital replica of an asset manager along the lines of the humanoid robots in Blade Runner, it’s slightly less futuristic, although it may be the next big thing in investing.
In an interview with Business Insider, Phil Fragasso, who evaluates financial advisors through his company, Audit Your Financial Advisors, said the term “robo-advisor” doesn’t accurately describe what these algorithms do.
“I think this whole robo-advisor terminology is a misnomer,” said Fragasso. “They’re not advisors. They’re really more like a fund of funds, like a mutual fund company.”
The software uses algorithms to make investment decisions for users. Generally, investors fill out an online questionnaire that gauges risk tolerance, according to Wall Street Daily. The algorithm takes this data and determines a diversified combination of asset class categories. The portfolio is created using exchange-traded funds.
Companies that utilize these robot algorithms have been popping up frequently over the last few years. Investors are pouring money into firms like Learnvest and Wealthfront, which utilize robo-advisors. Collectively, Betterment, Learnvest and Wealthfront have raised $95 million, meaning total funding for robo-advisors is something in the league of $25 billion, according to Kitces.
The market is taking notice of these companies, and so are investors. Assets handled by robo-advisor platforms have been growing steadily, reaching $15.7 billion in July, up from $11.5 billion at the end of March, WeathManagement.com found.
Why robo-advisors could be a good thing
Rather than being intimidated by these algorithms, it’s important to consider why they actually could be a positive development. Robo-advisors could be a great opportunity to develop relationships with younger investors while their financial situations are relatively uncomplicated.
When they’re just starting out, young investors may not need the assistance of a human asset manager yet, and robo-advisors also provide a more cost-effective alternative in the mean time.
And perhaps because of their tech savviness, younger people have been particularly interested in these platforms. In an interview with Financial Advisor Magazine, Wealthfront CEO Adam Nash said the company has discovered over time that its product has particular cache with Generation Y. Millennials tend to seek out advice and knowledge on the Internet before turning to an individual for assistance. As it turns out, investment decisions are no different.
“Over 50 percent of our clients are under 35 and 85 percent are under 50. This is a generation that has grown up with computers. They know what software is good for and what it’s not good for.”
And while this generation may not hold a significant number of assets yet, it will in the future. As millennials begin to age, they too will need counseling about retirement planning, mortgages and other hallmarks of growing older.
The best of both worlds
Robo-advisors aren’t going away, but neither are human investors. When it comes to nuanced interpretation of market trends, there isn’t a robot yet that can really help you make smart investing decisions. The key may be offering both services, encouraging the younger generations to get their feet wet with algorithm-based investing, and then transition them into working with human investors.
LearnVest is a great example of making this work. While the company is, by and large, targeting millennials with its approach, it uses a combination of robo- and human advisors to guide customers’ investment decisions. This could be a smart approach. According to Forbes, wealthier millennials prefer to have access to a human being now and then too.
Automated investing isn’t bad. Just like everything else that has been automated in the past few decades, such as documents and marketing, robo-advisors could benefit not just the financial sector but to the general public by providing easy-to-access investment opportunities for a wider range of people.