Automation has become an essential part of American life. Coffee makers brew your morning cup of Joe before you even wake up apps can hella cap within minutes, and AI assistants are everywhere to help us throughout the day. The trend is even begun to revolutionize money management. The rise of Robo advisors solves the problems that I have with respect to investing.
What I mean by that is I would much prefer to trust somebody else in this case. Trust the technology to make optimal investments for me as opposed to me having to spend the time. To do it myself and be the acknowledgment that like I am unlikely to perform better than an algorithm, investors, historically they’ve had two options when it comes to managing their investments, one they could, they could do it themselves, or so you can work with a financial advisor.
With the advent of Robo Advisors, there’s a third option, and that’s to merge the benefits of professional money management and advice with the convenience of an all-digital application.
Debut of Robo Advisor
Robo Advisors have had a meteoric rise in popularity since their debut in 2008. Today, Robo Advisors managed $460 billion, an increase of 30% compared to 2019, and the industry is expected to expand even further, with some analysts predicting it will become a $1.2 trillion industry by 2024. We have 600,000 customers across the US, and we’re managing $29 billion in assets under management.
However, critics remain skeptical that Robo Advisors can entirely replace human advisors in the future. I always think there’s going to be an element of conversation engagement that will be necessary, alongside maybe a Robo solution. But I think that’s going to be the future. I don’t think robots will replace humans, so how do Robo advisors automate their investments, and what makes their sudden rise to prominence possible? Robo Advisors are financial advising platforms that use algorithms to Taylor investment portfolios to individual investors with little to no human supervision.
Effeciency of Robo Advisor
Most Robo advisors seek to, at a minimum, understand an investor’s objectives, their timeframes, their risk appetite, and then, in turn, they use that information to create diversified investment portfolios. Robo Advisors will monitor your investments, and they will adjust them as needed to keep them in line with things like your target risk level. And your goals as they evolve over time. One of the primary qualities that make a Robo advisor so appealing is its convenience. All you need to do is sign up to take a short survey on your investment preferences in life goals. Then the robot. Plug your answers into an algorithm to determine the best way to invest your money.
Once you make your first contribution, the Robo advisor will begin to invest the money on your behalf. There’s a much more usaful experience from the time that you’re signing up all the way you know through the whole journey, and something I place great weight on in terms of you know how I want to spend my time or like the software that I choose to interact with, what used to take days, weeks, even months perhaps.
Advantages of Robo Advisor
We can now deliver a financial plan in minutes. A majority of Robo advisors make passive investments that rely on index funds or ETF’s. This not only helps with the diversification of portfolios but charges a lower fee. A 1% fee is the industry average for traditional or human financial advisors. With some smaller accounts charging fees as high as 2%. Meanwhile, five of the biggest Robo advisors in the market all charge fees less than 1%, with the majority charging less than .5%.
Depending on the account balance, instead of having to have 600,000 meetings with clients, we write an algorithm, and they all get the benefit of the advice directly through their smartphone app, so the technology reduces the cost dramatically. It allows it to be affordable for a lot of people for whom that device would not have been affordable fee compression, I think, has been something that’s been growing over the last decade. This is a very cost-effective solution. Then guess what robust advisors have really democratized the investment landscape, which I think has been beneficial due to their convenience and low fees. Robo Advisors are often recommended to younger investors who simply don’t know where to start, but experts reassure that other age groups can benefit from it as well. There are options for more sophisticated investors that want to kind of set it and forget it.
Robo Advisor in Near Future
You know where there might be a portion of their portfolio that they would like to be passive on. I do see you know in order population increasingly engaging with rival advisors. In fact, we actually did a study this past spring, and we are seeing interest from the baby boomer population of upwards of 25% of them considering a Robo advisor. The Great Recession of 2008 led to explosive growth in the financial technology sector, and startups like Betterment became one of the first companies to introduce Robo advising to the public.
Today. Betterment has grown to become the largest independent Robo advisor in the market. I joined in 2013 when the company was 20 people and had just about 15,000 customers spread all across the United States and was only managing $100 million in assets. And as of today, we are at about 300 employees. We have 600,000 customers across the US, and we’re managing $29 billion in assets under management in the beginning. Robo Advisors were met with great skepticism over their efficacy and profitability, a challenge that the industry still faces today.
Also, I think to be honest with you from the advisor’s perspective, and I thought there was some fear, right? And looking at Robo Solutions and potentially looking at them as maybe replacing human advisors down the Road, Robo Advisors’ sudden rise to prominence was made possible due to the massive. Anne, support from Millennials and Gen Z.
According to a recent survey from Vanguard, Millennials were twice as likely as young baby boomers to consider using a Robo advisor for investments. That means, yes, they’re like I believe there are things technology or algorithms can do better than humans can, and I have no problem trusting, you know, software to do that. People came to realize that advice can.
Benefit for more than just older, wealthier individuals. Younger individuals can certainly benefit from the advice they’re craving advice. They’re facing very difficult situations in their personal lives that that command advice after the success of startups like Betterment and Wealthfront.
More established brokerage firms, including Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo, began launching their own Robo Advisors in 2015. Vanguard, one of the world’s largest asset management companies, launched Vanguard Personal Advisor.
It is the largest direct consumer robot. Wise, we’re in the market with over $215 billion in assets under management. We have been working in an all-virtual model for decades now, and so unlike other traditional incumbents that might come to mind, you know we don’t have retail, brick and mortar locations that you can walk into instead across all of our channels.
We served close to 30 million investors, and the overwhelming majority of those touchpoints actually occur digitally against well-established companies like Vanguard. Smaller companies like Betterment believe their unique advantages that they are a tech company before they are a wealth management company.
The newer, younger rib advisors tend to be more innovative, more focused on the technology and their services. Because of that technology, many existing incumbents are more concerned about not losing money, not having money flow out than they are about gaining new customers. Bigger is not always better, you know, sometimes I like the smaller companies here.
They are a little bit more agile and also early on in their growth story in trajectory. So there are opportunities where they can continue to refine and modify their product to make it most suitable. And also to attract investors to their platforms.
Difference Between Ai and Human Advisors
On the other hand, the established companies have what startups don’t institutional experience, so they have established funds sometimes, or their core holdings are investment solutions the tools. They also have a lot of capital behind them. You know their firm so that they’re also could make changes. You have to remember that the Robo Advisors they’re not built by robots. They’re designed, created, and overseen by humans. And so, in Vanguard’s case, the. Until we have both on the investment and technology fronts is top-notch.
No matter who comes out on top, experts remind us that this kind of healthy competition allows for growth within the industry. Despite its immense popularity, the chances are slim that Robo Advisors will replace traditional human, financial advisors. That’s because one of the biggest disadvantages of Robo Advisors is the lack of personal touch. There’s always going to be a human element that’s missing. My problem always will be, you know, the emotional response. So take a situation like last year when we’re going through COVID-19 and markets are moving a lot, that technology is not going to explain to you what’s happening or. Or try and walk through with you how to potentially deal with this situation.
According to one study, 40% of those surveyed said they were uncomfortable using Robo advisors during periods of extreme market volatility. To combat this issue, many Robo advisor companies, including Betterment and Vanguard, began providing the option for hybrid services that combine both human and digital advice. Other investors we see crave validation from a financial advisor. They may have questions that aren’t clearly addressed on a website.
They may. If finding themselves and the really difficult situation where perhaps they don’t even know the right questions to ask, and so for those investors, being able to pick up the phone and have a video conference with the Financial Advisor, have a discussion about their needs. And once goes an incredibly long way to providing them the Peace of Mind that they so desperately need, some combination did too, probably is where we are headed, you know, for the future, some hybrid type of situation where you could lean into kind of the exechat ease of use from a technological perspective.
Anne is also balancing that with a human advisor that can offer you a little bit more engagement. This subjectivity that I think a lot of investors are looking for. Time is on the side of the robot advisory industry as the technology continues to improve and the younger generations accrue more wealth. New investors that are coming on board are far more technologically inclined.
Then older generation. So I think the robot space has room to grow the big independent players like Betterment will continue to grow as generationally more people my age and younger are used to using that technology and inherit their parents’ money from the incumbents.
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