Robo advisors are gaining popularity. Can they replace a human consultant?

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Robots want to be your next financial advisor.

Not long ago, that idea might have had a sci-fi fantasy flavor – perhaps the “Star Wars” C-3PO cyborg in a power suit on Wall Street.

But robots, or so-called “robo-advisors,” could soon manage more than $ 1 trillion in American wealth.

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

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

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

“Sometimes I use my iron 7 and other times I don’t, it just depends on where I am.”

‘I’m everywhere’

The robo advisors for the daily investor started popping up around 2008, the year after the iPhone made its public debut.

A little over a decade later, robo-advisors were managing around $ 785 billion, according to Backend Benchmarking, which specializes in digital consultant research.

Dozens of companies have built their own models to take advantage of popularity and a growing digital culture.

They include independent stores such as Betterment, Personal Capital, and Wealthfront; traditional Wall Street brokers such as Fidelity Investments, Merrill Lynch and Morgan Stanley; and those like financial engines that cater to 401 (k) plan investors.

Established gamers who have historically focused on an older, richer customer base can also leverage technology to woo a new class of younger investors, who have shown enthusiasm for the digital financial realm via online stock trading apps like Robinhood. and for assets such as cryptocurrency.

“They’re everywhere now,” said David Goldstone, head of research and analysis at Backend Benchmarking, of the robo-advisors. “Almost all major banks and discount brokers have launched one in the past decade.”

Who is a good candidate?

Robots tend to be particularly suited to new investors who haven’t amassed much wealth yet and who would like to outsource money management to a reasonably low cost professional, according to industry experts.

For one, robo-advisors offer a low barrier to entry, due to low or non-existent minimum accounts.

Acorns, Fidelity Go, Betterment, and Ellevest, a robo service for women, allow customers to subscribe to their basic digital service without any prior wealth. Merrill Edge Guided Investing, SigFig, SoFi, Vanguard Group, and Wealthfront have lows ranging from a few dollars up to $ 3,000.

Meanwhile, traditional businesses tend to manage money for clients with at least $ 250,000 to invest, Goldstone said.

Perhaps unsurprisingly, the average robo user gets younger. For example, about 90 percent of Wealthfront’s 470,000 customers are under the age of 40, said Elly Stolnitz, a spokesperson for the company. Their average balance is around $ 60,000.

I think it attracts people who want to delegate their portfolio management.

Dan Egan

vice president of behavioral finance and investment at Betterment

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

“[Our users] they want to be able to manage money the same way they manage other things, like [online food delivery via] DoorDash, ”Stolnitz said.

Betterment also has an average user under the age of 40, with an account ranging from $ 55,000 to $ 60,000, according to Dan Egan, the company’s vice president of behavioral finance and investment.

But age and wealth aren’t the only factors at play, he said. The firm has clients between the ages of 60 and 70 with multi-million dollar portfolios; the oldest user is over 90 years old.

“I think it attracts people who want to delegate their portfolio management,” said Egan.

The fees for such management are typically much lower than those of a traditional financial advisor who charges 1% annually on client assets. The typical robo charges 0.25% to 0.35% annually for their consulting service – about a quarter of the cost, Goldstone said.

In dollar terms, this means that 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 consultants charge a 1% fee. Some have switched to monthly subscription fees or one-time consulting fees, for example.)

Some robo-advisors like Charles Schwab and SoFi don’t charge any advisory fees; others like Fidelity and SigFig only charge balances over $ 10,000.

Portfolio investments – often low-cost index mutual funds or exchange-traded funds – carry an additional fee. Some companies invest clients in their branded funds, which increases their income via fund fees. They can also impose minimum or higher account fees for tiered service levels.

“If you don’t have a lot of money, you’re between 20 and 30, the portfolios are pretty damn good,” said William Whitt, strategic advisor to Aite-Novarica Group, a consulting firm.


Using a purely digital service can involve trade-offs.

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

These can include reasoning behind a specific strategy recommendation, or managing daunting times like job loss or a failing stock market.

Financial planners also believe they are better suited to proactively and to delve into the needs of some clients beyond money management, whether it is tax, estate or business planning, which may prove too complex or nuanced for an online questionnaire. , eg.

“We do more than just invest,” said Johnson of Delancey Wealth Management.

Helping a client choose whether to exercise stock options, purchase long-term care or liability insurance, or start a business as an LLC or other type of entity is likely beyond the scope of a digital consultant. Johnson said.

Alistair Berg | Digital Vision | Getty Images

It is also a challenge to automate the client’s psychology.

The online questionnaires that robo-advisors use to determine the best portfolio for a client can’t probe responses and body language in the same way a human consultant might, Whitt said.

According to some experts, even determining what makes a customer happy – in essence, the purpose behind their money – may be beyond the purpose of robots.

“Financial advisors can ask follow-up questions to build a picture and understand,” Whitt said.

The Securities and Exchange Commission, which conducted a recent review of robo-advice services, also questioned whether they would always recommend appropriate portfolios given clients’ stated risk tolerance. (The agency did not name the specific companies it looked at.)

Of course, not all human consultants necessarily perform these functions appropriately. Some may manage client investments solely, without evaluating goals or other complex financial planning details, and if so, clients may get more value from a robotic consulting relationship.

“I think there is value that humans provide,” said Brian Walsh, senior manager of financial planning at SoFi. “But on the investment side, I think robots have a huge advantage in being cost efficient.”


Robo platforms have also evolved to take some criticism into account and satisfy a larger pool of investors.

For one, many have expanded to offer more intricate levels of “goal-based” planning; they can collect investment and savings advice based on short- and long-term goals such as saving for a home, vacation, funds for college, or retirement.

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

Charles Schwab’s premium service, for example, charges $ 300 upfront for planning advice and a $ 30 monthly subscription fee for access to human advice, which complements his digital investment management.

Even at Wealthfront – which it considers “a failure of our product if you have to call us” – users can call a hotline to speak to accountants, CFPs and financial analysts if they have a question, Stolnitz said.

Ultimately, whether a robot or a human is managing your money depends on what an investor wants from the relationship.

“I think robo advisors are good – they give investors more options,” Johnson said. “I would hate a world where people could only invest in one way.”

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.


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