Robo-advisors find their niche

The robo-advisory market is booming.

The global robo-advisory market, valued at $4.6 billion three years ago and estimated by some at $41.5 billion in 2023 is expected to grow to as much as $206 billion by 2028, according to recent studies. And the amount of assets under robo-advisory management — about $2.7 trillion — is expected  expected to nearly double by 2027.

When robo-advisor platforms arrived on the scene in 2010, there was a hue and cry that they would replace traditional advisors. That, of course, never happened. As the market has evolved, these platforms have found a place with investors who might not be able to afford traditional advisory services. Some robo-platforms pair automated robo-investing with advice available from advisors. And, most recently, B2B platforms meant to assist traditional advisors in their practices have appeared on the scene.

Robo-advisor platforms offer automated, algorithm-driven financial planning services with little to no human oversight. The customer costs are low, with services frequently offered at $0 commission. Account minimums generally range from $2,000 to $25,000. Clients pay annual advisory fees of 0% to 0.55% or a flat fee of around $75 annually.

The authors of a recent Georgetown University study called robo-advising “a transformational force in personal finance” because it puts complex investment decision making, previously not available to the general public, in the hands of many who could not afford the fees of a traditional advisor.

The first automated investor platform was a semi-automated financial manager offered by Mint in 2006. More platforms appeared on the scene following the 2008 market downturn. Betterment, launched by John Stein in 2010, was one of the first robo-advisors marketed to the public. 

“I think that especially with the Vanguards and the Schwabs, they often rolled out a product that emulated what we brought to the table,” said John Mileham, Betterment’s chief technology officer.

Integrating with ‘human advice’

“We’re really thrilled that the robo-wave has taken over,” Mileham said. “Now it gives us the opportunity to integrate that better with human advice and integrate that better with what comes next. If AI-based augmentation is the next thing, then we’re here to bring that to the table as well.”

Financial giants such as Vanguard, Fidelity, Charles Schwab and T. Rowe Price — as well as fintech leaders including Acorns, SigFig and Wealthfront — offer such algorithm-driven automated investment platforms. Use of these platforms was also accelerated by the COVID-19 pandemic.

In addition to adding lump sums to your investments, Acorns lets you round up your purchases on linked credit or debit cards, then adds the change to a computer-managed investment portfolio. 

One defining feature of robo-advisors is their low cost. Vanguard Digital Advisor, for example, requires a minimum of $3,000 in assets to enroll. For the all-index investment option, investors don’t pay more than $2 per year for every $1,000 Digital Advisor manages.  Vanguard describes its robo-advisor as an online platform that manages investments automatically. Its investment advice “comes from an algorithm instead of a person and can take a lot of the time, guesswork and stress out of owning a portfolio.”

Betterment charges $4 a month or 0.25% annually for its automated investing account, which promises “expert-built portfolios, ongoing guidance and tax-efficient strategies at just a fraction of the cost of a traditional advisor.”

Betterment also offers access to certified financial planners with its premium plan, which requires a minimum balance of $100,000 and charges a 0.40% annual fee.

When getting started with one of the many robo-advisor platforms, investors will be asked questions similar to those that a traditional advisor would ask, such as ones about goals, risk tolerance and the length of time the client wants to stay invested. At that point, technology will take over to suggest a portfolio. The robo-advisor will manage the investments over time, rebalancing periodically. 

Empowering consumers with investing skills

The crucial disruptive feature of robo-advising is “the empowering of consumers with skills and rules of thumb for investing that are based on finance and economic theory and that would not be accessible to ordinary households who have no training in either field if not through the payment of large human advising fees,” according to “IT Meets Finance: Financial Decision Making in the Digital Era,” a study conducted at Georgetown University last year.

The disruption by the early entrants, including Betterment and Wealthfront, eventually led to the established investment firms, such as Vanguard, Fidelity, E*Trade, Charles Schwab, T. Rowe Price and many others, introducing their own robo-advisor platforms. 

Wealthfront, with about $43 billion in AUM, primarily offers a robo-advisor platform. However, Betterment offers both a purely robo-advisor platform and its premium service, which makes a team of Certified Financial Planners available to clients who have a minimum of $100,000 invested on the platform. 

In addition, Betterment for Advisors enables a traditional advisor to leverage the use of the platform within their practice. This provides the advisor with the capability to build and manage custom model portfolios with options such as automated trading, rebalancing, tax-loss harvesting, asset allocation and a low-cost 401(k) solution. The platform also provides back-
office support and allows easy onboarding of customers and transfer of their assets.

Betterment, which describes itself as a $40 billion AUM business serving more than 800,000 clients, said that although the company is heavily weighted toward retail clients, the B2B side of the business is growing rapidly.

Mileham said Betterment for Advisors provides traditional advisors with state-of-the-art tools for their clients.

“The expectation of having easy access to your investments through your phone is an increasingly just-expected capability,” explained Mileham. 

A role for AI?

Although AI may be the technology talk of the day, its application in the robo-advisor world is mostly limited to non-customer-facing aspects of the business, said Mileham. 

“With all of our clients, all of our end users, we’re in a fiduciary RIA relationship with them,” said Mileham. “As a result, all of the things that smell like advice from us have to be actual advice to the highest standard.

“So we have industry-leading experts doing the quantitative analysis that goes into our portfolio construction and the trading algorithms that we do to minimize tax impact and all of that stuff.

“It’s math, right?”

While AI isn’t used at the core of the investment program, Mileham said, Betterment is looking for places to use it in ways that won’t impact the company’s fiduciary responsibilities.

“We’re always looking at what the opportunity is. … I run a large engineering team. We build a lot of software. Having an AI assistant at your seat while you’re coding — helping you identify patterns and auto-complete, and helping you debug and diagnose the issues that you’re banging your head against — is a huge productivity win. It’s not necessarily going to break the internet with how revolutionary the application is, but there’s a ton of value there.

“Generative AI, in its current form and its current generation, is an ideal human assistant,” he said. “But it is not capable of being an accountable expert in the way that people are.”

At the end of the day, said Mileham, “it’s hard to match a human financial planner who deeply understands your hopes and dreams and is able to translate them into what you want to achieve in your life and how you can go about it.” 

John Forcucci is InsuranceNewsNet editor-in-chief. He has had a long career in daily and weekly journalism. Contact him at johnf@innemail.