When robo-advisors first started rolling out a few years ago, it’s likely they were largely ignored by the rank-in-file among the investment advisory industry. But as the years have passed, the number of robo-advisory services has increased, and the sophistication of the services has grown, they’re likely a game-changer in the investment world. Their impact is rising to the level where robo-advisors are changing the way all advisors work, even the “old school” brick-and-mortar firms.
Here are five ways robo-advisors are change the game for investors, but also the investing industry and financial advisors.
1. Less Expensive Investment Advice
Until recently, investment advisors was one of the last remaining professional industries to successfully resist the tidal wave of technology that has radically reformed nearly every other part of the economy. Sure, technology may have streamlined an advisors job by providing real-time access to information and trading, but it never seriously threatened their position in the investment pecking order.
After all, investment advisory required a large amount of one-on-one interaction with the client, something technology couldn’t do.
The technology that has been incorporated by typical investment platforms enables robo-advisors to service many more customers, and to do so at a far lower cost per client. This is enabling robo-advisors to provide their services for a small fraction of the price to investors than what traditional human advisors charge.
While robo-advisors are primarily competing with each other on price, it’s inevitable that as the services become more popular, they will also exert downward pressure on the fees charged by traditional investment advisers.
The technology involved is also enabling investors to know exactly what they will be charged for the services they are receiving. For example, most robo-advisors operate on a sliding fee scale, generally charging a smaller percentage based on the amount of money the client has under management. They may even charge a flat fee on small accounts. But even at the higher fee levels, robo-advisors are still considerably less expensive than traditional investment advisors.
The same portfolio size that may cost an investor several thousand dollars per year with a traditional investment advisor, is likely to be only a few hundred per year with a robo-advisors’ service. That difference alone is drawing more attention to the robo-advisor industry.
2. Easier to Compare Services
Since robo-advisor systems are based on well-defined program parameters, it’s much easier for investors to compare services and fees between various advisors. That comparison was always more murky between traditional investment advisors.
In fact, an investor might choose a traditional investment advisor based on reputation and referrals, rather than on hard numbers, such as fees and actual performance.
In the current environment, however, an investor can choose between the various robo-advisors’ services, or even maintain two or more at the same time. This is even more likely since different robo-advisors specialize in different investment strategies.
3. Greater Use of Technology
To one degree or another the investment industry has always relied on the latest technology. Investors have also been able to benefit from technology through online trading and discount brokerage services. But what is fundamentally different about robo-advisors is their very near total reliance on technology.
Using robo-advisors, investors now have liberal access to comparative data. Whatever information they want, and that will help them in making investment decisions, as well as track those decisions once made, is available on robo-advisor platforms.
Given that the younger generations in particular — the investors in training — are much more comfortable with technology than the older cohorts, this bodes well for robo-advisors. But perhaps not so well for traditional investment advisors and firms.
Robo-advisors provide the type of technologies younger investors are comfortable working with now. That technology can even prove to be decisive in the choice between using a traditional investment advisor and a robo-advisor.
4. DIY Investing Options (aka Self-Service)
With the increase in technology, self-service is coming to every corner of the economy. We already see it in ATM machines, self-service gas stations, self-service checkout lines, and book-your-own travel packages. With robo-advisors, self-service is now coming to the investment world, making it easy for investors to DIY.
Though there are a variety of levels of human interface with robo-advisors, there’s unquestionably less than is the case with traditional investment advisors. Where a client of a traditional advisor would manage his or her affairs with a phone call, it can now be done with a trip to the website. And along with that, virtually every robo-advisor service in existence has a strong interface with mobile devices.
While investors will pay less for the service, they will also have vastly less human contact.
This is something of a double-edged sword. For the younger generation, who have been raised on such technology, this is a natural development. But for older investors, who are used to hands-on management by human professionals, it could pose something of a dilemma. For the most part, robo-advisors require more hands-on involvement than older investors are accustomed to.
We might even think of it as the Walmart ([quote type=”stock” symbol=”WMT”]) model coming to the investment world. Lower prices — but less involvement by the service provider.
5. Increased Access to Investment Services
Perhaps the biggest change that robo-advisors are bringing is the availability of investment advisory services to the very small investor.
Traditional investment advisors have always targeted the wealthier client base. They typically have minimum portfolio sizes of anywhere from $200,000 to $2 million, which excludes the majority of U.S. households.
Robo-advisors are reaching out to much smaller investors. For example, Wealthfront has a minimum account balance of $5,000, while Betterment has no account minimum at all (with a requirement to fund your account for at least $100 per month). In a real way, robo-advisors are democratizing investment advisory services by bringing professional investment management to virtually every investor in America, regardless of size.
This will also have a profound effect on young investors, who almost universally start out as small investors. An entire generation of young investors will come of age in an environment where using the services of a robo-advisor will be the norm.
Those same investors will likely stay with robo-advisor even as they mature and their portfolios expand. They’ll be fully accustomed to the technology involved, as well as the do-it-yourself nature of robo-advisor platforms.
Readers: how has the robo advising platforms changed your outlook on investing? Have you embraced this new technology side of investing?