This is the first in a series of articles that explain, in plain English, new technology tools and platforms that are changing the face of finance. Check out other articles in this series here.
What is a roboadvisor?
A roboadvisor (also robo-advisor or robo-adviser, if your roll that way) is an investment advisor that provides automated portfolio management using software. Instead of a human investment advisor choosing how to allocate a portfolio, roboadvisors use algorithms.
Why is everyone obsessed with roboadvisors?
Well, if they’re as good (or better than) as human investors, the success of roboadvisors threatens the livelihood of registered investment advisors (RIAs) and stock brokers. Most roboadvisors charge around 0.25% per year on their clients’ assets, driving down fees in the investment management industry. Some don’t charge any fees. In an industry suffering a crisis of trust, many younger investors have shown they’d rather trust a website than a local financial advisor.
What kind of investment strategies do roboadvisors use?
Most roboadvisors provide portfolios comprised of a handful of exchange traded funds (ETFs). Robos frequently provide ongoing, automated portfolio rebalancing and some provide daily tax-loss selling. New roboadvisors have entered the market with more sophisticated investment strategies.
Why would clients want to work with a roboadvisor?
Some of the pioneering roboadvisors focused their marketing on newly-minted millionaires who made their money working for technology companies. These people are as comfortable using an Internet-based service to manage their investments as they are using an app to order a taxi. Clients feel like the advice they receive from roboadvisors is unbiased and the fees low. Clients with smaller portfolios have complained that they don’t get the attention of their wealth managers and consequently, don’t get the same level of service larger clients get. Roboadvisors claim to provide the same service to all their clients.
Are roboadvisors succeeding?
It depends what you mean. Many of these firms are startups and have raised lots of venture capital to launch and acquire new clients. But in terms of assets under management, they still have just a tiny sliver of the entire asset management pie. Newer entrants to the roboadvisor market are owned by incumbent asset managers, like Vanguard and Schwab. In just a few months, these in-house solutions had more assets than all the other roboadvisors combined.
Are roboadvisors really fully automated?
Some, yes. Many robos are what experts call hybrid roboadvisors. These hybrids combine a significant amount of portfolio automation with a more traditional interaction with a professional, human advisor. Some human advisors have introduced their own roboadvisor offerings to complement their professional workforce.
So, it isn’t all-or-none when it comes to making a decision between a roboadvisor and human financial advisor?
Correct. There are companies that provide private-label software to traditional investment advisors so that they can launch their own roboadvisor products.
What do traditional asset managers think of roboadvisors?
That depends. Some have remained skeptical, choosing instead to wait and see how this all plays out. Others have developed their own offerings, like Vanguard and Schwab. BlackRock, for instance, acquired an independent roboadvisor. To date, there hasn’t been a lot of M&A in the space.
Photo credit: ell brown via Visual Hunt / CC BY