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The Future of Robo-Advisors; Are Small Independent Robo-advisors and Human Advisors Doomed?

With recent leaps in artificial intelligence technology, many financial advisors worry whether their position will be replaced by machines. The future of robo-advisors is transitory, and human advisors are uneasy.

Human financial advisors are particularly worried because of the explosion of new AI platforms. These robo-advisor AI systems are a competitive challenge. Human advisors are scrambling to adapt to a changing environment.

In the investment world, artificial intelligence plays a key role. Currently, there are over 200 platforms known as “Robo-advisors” that create and manage investment portfolios for their users. Certainly, all of them won’t survive.

What does the future of robo-advisors hold? Are human financial advisors doomed?

What Does a Robo-Advisor Do?

Most robo-advisors create an investment portfolio based on the choices you select from a simple survey. Although the surveys vary, they are designed to assess your goals and risk tolerance or comfort.

In general, the platforms offer a diversified menu of investments. Your final portfolio is set up to comply with your stated goals and risk level. You choose the dollar amount you wish to invest. Essentially, it is like letting a system control your investment without requiring a human-touch. Most of the time, the system works much like a human investment advisor. And that’s the competitive problem for human financial advisors.

Robo-advisors generally charge significantly lower fees than human financial advisors.

On the other hand, though investing with a robo-advisor is simple, there are some downsides you should understand.

Robo-Advisor Investing Cautions

Much like any online-based industry, the robo-advisory field also has the potential for scams and inappropriate tools. It is best to conduct thorough research before you create an account with any online investment platform.

Besides the risk, most robo-advisors also cannot provide the same level of customization as human investors. To determine the investment goals and needs of a client, the digital platform requires the client to complete a simple survey.

On the other hand, human advisors will likely sit down with you for a couple of hours, asking numerous questions, to create a highly targeted investment portfolio for you. Robo-advisors can only slightly tailor portfolios to match your unique needs and goals.

As a matter of fact, the level of customization available with robo-advisors might be low and their “Recommended” strategies are recommended to many other clients. This may lead to an investment portfolio not tailored specifically to your distinct situation.

Despite their drawbacks, most robo-advisor’s portfolios are based upon well-regarded investment theory, and their fees are quite affordable.

Should You Avoid Robo-Advisors?

This begs the question; should more people invest using robo-advisors? Or is it best to avoid robo-advisors because their future is uncertain?

Investing with a robo-advisor is easy and anyone can do it. Robo-advisory services can be compared to the popular Forex platforms where anyone with a few bucks can get into the foreign currency markets.

Yet, just because the future of robo-advisors is uncertain, doesn’t mean you should shun the industry. Robo-advisors offer low fees and sound investment guidance for many types of investors. So, in short, don’t avoid robo-advisors.

Are Robo Advisory Platforms Expected to Replace Traditional Investment Firms?

Due to the success of robo-investment, many traditional financial advisors are worried they’ll be replaced. Yet, when reading the tea leaves, the future of robo-advisors is still cloudy.

Though robo-investing is on the rise, it is unlikely to completely replace traditional investment services. Many people prefer walk-in meetings with their favorite investment advisory firms. And robo-advisors, though growing rapidly, remain a small piece of the investment pie.

Nevertheless, investors who manage their client’s portfolios might benefit from learning how to use these robo-firms to their advantage. Diversifying an investment portfolio is important. Many human financial advisors are combining robo-investments with traditional methods for a one-two punch. This can reduce client costs and offers a best of both worlds client-solution.

This type of investment is often called robo-hybrid investments, and it is an industry that is currently experiencing rapid growth.

Can Small-time Robo-Investment Firms Succeed?

New robo-advisory firms are sprouting up rapidly and many don’t see the light of day.

Currently, about 200 firms dominate the robo-investment market. The legacy firms with a good reputation and proven track record may benefit from an independent future or the potential to be bought by bigger players.

One of the earliest robo-advisors, Betterment, was a break-through independent platform in the investment world. The service has recently added human financial advisors and continues as a low fee leader in the robo-advisor sphere.

Since its launch in 2008, the company has steadily expanded and updated their algorithms.

For start-up robo-advisors, competing with such a firm will be a challenge, unless the new firm can provide additional features and a better return on investment combined with lower fees.

Not many small-time firms have the resources to invest in upgrading their platforms and algorithms. I believe small independent robo-investment firms will struggle to receive a cut of the investment market, unless they are backed by powerful investors and a large sum of funds.

Nevertheless, hybrid-robo firms (investment firms that combine robo-investments with a human-touch) are predicted to grow much faster than their “pure” robo-counterparts. And the Schwab, Fidelity, E*Trade, BlackRock and other big firms are tough to beat as they develop or acquire their own robo-advisory shops.

Human-Robo Hybrid Advisor Firms

Charles Schwab, a popular brokerage company, recently launched their own robo-human investment platform, known as Schwab Intelligent Portfolios. The new service provides investors with an easy-to-use platform with low-entry level requirements and zero management fees.

This platform is the only robo-advisor offered by a big brokerage firm with no investment management fees. They also hold the honor of being one of the top performing robo-advisors.

What is the Future of Robo-Advisors and Human Financial Advisor Shops?

If you’re concerned whether robo-firms will take over the investment services industry, there is little need to worry. On the contrary, ending up in the trash heap is also unlikely for the robo-advisory industry. Although, a recent ThinkAdvisor article, “Will Robo-Advisors Be Terminated?” by Ginger Szala, suggested that these once impressive disruptive technologies were facing strong headwinds.

John Ndege, CEO of Pocket Risk, a provider of risk tolerance questionnaires believes that the “tipping point” for robo-advisors will be gradual. He expects larger firms to build or buy robo-technology and growth to slow. Eventually, the venture capital may dry up and valuations may stall.

The next market crash is likely to have an impact on the future of robo-advisors.

For investors, sticking with the robo’s attached to big brokerage companies or those firms with proven track records is probably the best solution.

Ultimately, the future of robo-advisors is like the future in general-unknowable.

Keep your eye on the trends and when choosing a robo-advisor, perform your due diligence first. Small independent robo-advisors might have a tougher road ahead than the bigger players. Human advisors will need to adapt, to compete.

 Regardless of whether you choose to use a robo-advisor or not, you can’t pass up this free financial investment and money management tools giveaway. (No spam and you can unsubscribe at any time)

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Barbara A. Friedberg, MBA, MS

Barbara A. Friedberg, MBA, MS

2 Comments

  1. Steveark
    September 11, 2017 at 2:36 pm — Reply

    I have 100% of my investments with low fee advisors that many people consider Robo’s. Personal Capital, Vanguard management and Betterment have different strategies and different investments and my plan is to follow them all through the remainder of this bull market and the inevitable major correction to come. I suspect that the experiment will show what I already expect. The extremely aggressive Betterment that is doing better in an up market will take it on the chin when the market tanks, the extremely conservative Vanguard which is now lagging the others will glide through the correction with minimal pain and Personal Capital which is in between will, well, be in between. My only quandary is whether Personal Capital’s higher fees will prove to be justified. Time will tell.

    • September 24, 2017 at 1:48 pm — Reply

      Hi Steveark, Please keep me posted on your results. This is an interesting experiment. You are savvy to understand that results will vary depending upon market conditions. You might also like to review Condor Capital’s research on robo-advisor returns here: https://www.roboadvisorpros.com/2017-best-robo-advisor-performance-research/. I’ll be updating the robo-advisor return data soon to reflect recent performance. Thanks so much for writing in. I look forward to hearing how your investments pan out over the coming time period.

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