Surprise! Baby Boomers Pushing Robo-Investment Growth

Conventional wisdom holds that millennials are driving the growth of robotics-based investment advice, but that’s not entirely true.

For sure, younger investors are naturally drawn to robo-advisory services. The digital advice market is pegged to reach $500 billion in assets under management by 2020, and will rise further to $2.2 trillion by 2022, according to KPMG. Tech-savvy millennials have, in great numbers, climbed aboard the robo bandwagon.

But times change and, these days, it’s actually baby boomers who might be the fastest-growing demographic for robo-advice, according to T Rowe Price.

“Robos don’t just appeal to the young,” the firm concluded in a new report. “In fact, the majority of our robo clients are Baby Boomers or Silent Generation.”

Fin-tech companies are already tapping into burgeoning interest in robos from older investors. United Income, a digital investment services firm backed by Morningstar and eBay, is specifically targeting retirement-minded investors between the ages of 50 and 70.

The Washington D.C.-based firm rolled out a new robo platform in September that charges up to 0.8 percent fees to mostly older customers.

In return, those boomer clients gain access to concierge services like the management of retirement accounts, are automatically enrolled in Social Security and Medicare, are offered second-career options, and are steered toward volunteer work in retirement.

'People are Living Longer'

United Income earned $200 million in assets under management in a private beta launch.

“Thanks to advancements in healthcare, people are living longer and are retired longer. But, the market has struggled to find a way to extend the life of money as effectively," said Matt Fellowes, founder and CEO of United Income. "By harnessing powerful new technology and a growing body of data and academic work, we have been able to invent a new approach to money management that aims to extend the life of money.”

Ask an actual baby boomer and he or she will likely say that older Americans are attracted to robo-advice platforms for a laundry list of reasons. Aside from retirement services, they put fees and relaxation at the top of that list.

“Boomers want to save on fees, and also many of them live active lifestyles and would welcome their investments just being on auto pilot, using algorhythms to ferret out the best returns,” said William Seavey, baby boomer and founder of RetirementPossibilities.net. “So maybe it's laziness, too.

Robo advisors aren’t calling their boomer clients lazy, but they do agree that fees are a big issue with older investors.

“Lowering fees and expenses is one of the easiest ways to virtually guarantee a better long-term return assuming the investment management side of the equation is equal,” said Scott Schneider, president of Zacks Advantage, a Chicago-based robo advisor.

According to the report, “A Look at 401(k) Plan Fees” by the U.S. Department of Labor, a 1 percent difference in fees and expenses over a 35-year investment period will reduce a retiree’s account balance by over 28 percent.

“That is a “real” cost that simply can’t be ignored, and the more older investors become educated about fees, expenses, and new investing alternatives, the more they will seek new investing solutions to help them successfully reach their investing goals,” Schneider said.

Bull Market Effect

Performance matters, too. With the stock market continuing its generally upward climb, robos are getting a longer look by boomer investors, experts say. But that could work against robos if the market were to go south.

“The biggest factor influencing this trend is the bull market in equities,” said Robert Johnson, president and chief executive officer of The American College of Financial Services in Bryn Mawr, Pa. “Investment success in a bull market is pretty simple and easy – after all, a rising tide lifts all boats.

“The real test of the effectiveness of robo-advisors will be in a protracted bear market in equities. When a significant market correction occurs, those individuals utilizing robo-advisors will have “no one to talk them off the ledge,” Johnson said.

In a downward spiraling market, many robo advisory clients will succumb to their behavioral biases and will sell low after a significant correction, only to buy high after markets have rebounded.

“One of the greatest benefits of a human advisor is to reassure investors that their long-term investment plan is a sound one and that they should continue to invest according to that plan despite the vagaries of the market,” Johnson said.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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