Automation has become an essential part of American life.
Coffee makers brew your morning cup of Joe before you even wake up.
Apps can hail a cab within minutes and AI assistants are everywhere to help us throughout the day.
The trend has even begun to revolutionize money management with the rise of robo advisors.
It solves the problems that I had 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 A: spend the time to do it myself and B: the acknowledgment that I'm 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 two, you could work with the financial adviser.
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.
Robo-advisors have had a meteoric rise in popularity since their debut in 2008.
Today, robo-advisors manage $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 U.S.
and we're managing $29 billion in assets under management.
However, critics remain skeptical that robo-advisors can entirely replace human advisers in the future.
I always think there's going to be an element of conversation engagement that's going to 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 made their sudden rise to prominence possible?
Robo-advisors are financial advising platforms that use algorithms to tailor investment portfolios to individual investors with little to no
human supervision.
Most robo-advisors, they 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'll adjust them, as needed, to keep them in line with things like your target risk level and
your 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, take a short survey on your investment preferences and life goals.
Then the robot plugs 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.
Robo-advisors tend to offer just a much more useable experience from the time that you're signing up all the way through the whole journey.
And it's something I place great weight on, in terms of how I want to spend my time or I have software that I choose to interact with.
What used to perhaps take days, weeks, even months, we can now deliver a financial plan in minutes.
A majority of robo-advisors make passive investments that rely on index funds or ETFs.
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 advice 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? Robo 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's options for more sophisticated investors that want to kind of set it and forget it, you know, where there might be a portion of their
portfolio that they would like to be passive on.
But I do see, you know, an older population increasingly engaging with robo-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 an 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 a $100 million in assets.
And as of today, we are at about 300 employees.
We have 600,000 customers across the U.S.
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 an advisor perspective, 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 interest and 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, I believe that there are things, technology or algorithms that can do better than humans can, and I have no problem
trusting software to do that.
People came to realize that advice can benefit far more than just older, wealthier individuals.
Younger individuals can certainly benefit from advice.
They are craving advice.
They are facing very difficult situations and their 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 robo-advisor 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 serve close to 30 million investors and the overwhelming majority of those touch points actually
occur digitally.
Against well-established companies like Vanguard, smaller companies like Betterment believe their unique advantage is that they are a tech company
before they're a wealth management company.
The newer, younger robo-advisors tend to be more innovative, more focused on the technology and the services that they can offer because of that
technology then a lot of the existing incumbents who are more concerned about not losing money, not having money flow out, than they are about
gaining new customers.
Bigger is not always better.
Sometimes I like the smaller companies here.
They're a little bit more agile and also are early on in their growth story and 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.
On the other hand, established companies have what startups don't, institutional experience.
So they have established funds, sometimes there are core holdings, their investment solutions, the tools.
They also have a lot of capital behind their firm.
So they also can 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 talent we have, both on the investment and technology fronts, is top notch.
No matter who comes out on top, experts remind us that it's this kind of healthy competition that allows for growth within the industry.
Despite its immense popularity, the chances are slim that robo-advisors will replace traditional human financial advisers.
That's because one of the biggest disadvantages of broker-advisors is the lack of personal touch.
Clearly, there's always going to be a human element that's missing.
My problem always will be the emotional response.
So take a situation like last year when we're going through Covid-19 and markets are moving a lot.
The technology is not going to explain to you what's happening 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 adviser.
They have questions that aren't clearly addressed on a website.
They may be finding themselves in a 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 a financial adviser, have a discussion about their
needs and wants goes an incredibly long way to providing them the peace of mind that they so desperately need.
Some combination of the two probably is where we are headed for the future, some hybrid type of situation, where you can lean into
kind of the execution, the ease of use from a technological perspective, and also balancing that with a human adviser that can offer
you a little bit more engagement, the subjectivity, that I think a lot of investors are looking for.
Time is on the side of the robo-advisory industry as the technology continues to improve and the younger generations accrue more wealth.
New investors that are coming on board, they're far more technologically inclined than older generations.
So I think the robo space has room to grow.
The big independent players like Betterment are going to continue to grow as generationally, more people my age and younger are used to using that
technology and they inherit their parents money from the incumbents.