Robo-Advisors: A Growing Trend in the Financial Industry

A robo-advisor is “an online wealth management service that provides automated, algorithm-based portfolio management without the use of human financial planners.” – Investopedia.com

Robo-advising has become not only a hot-topic in the financial industry, but a big business.  Over the past few years, many of the largest players in the financial industry have spent money buying into this technology.  UBS (SigFig), Goldman Sachs (Honest Dollar), Blackrock (FutureAdvisor), Invesco (Jumpstart), Fidelity (eMoney) and Northwestern Mutual (LearnVest) have all invested in robo-advisor technology.  The rise of financial technology and automation has created a race in which no one wants to be left behind.

Each robo-advisor offers slightly different features and design, but the fundamental idea remains the same.  There are a growing number of people in our population that are more technologically savvy and have a higher comfort level with the use of technology than the rest of us.  Robo-advisors offer a low cost option for those investors that want to be more hands off.  Some of the features offered include: automation of risk assessment, asset allocation, rebalancing, portfolio planning and performance tracking.  Because of lower minimums, these platforms also offer an option for individuals who may not have enough assets to invest with a wealth manager or larger institution.

Due to the infancy of this industry, there are questions that need to be sorted out.  First, this industry has yet to go through a recession or serious bear market.  Part of the service of a traditional advisor is to help clients from making rash or emotional decisions during times like these.  When using a robo-advisor, there is no relationship manager to help manage an individual’s emotional decision making.  Second, there exists a potential for problems with liquidity and pricing of securities due to automation of trading and the growing use of passive vehicles on these platforms.  At first there were only a few players in the industry and they gathered a boat load of venture capital to fund operations.  Since that time, there has been a flood of smaller players and more recently a flood of larger institutions.  Although it is a fragmented industry right now, it remains to be seen how the industry plays out long term.