-- First we had Robocop, the multi-sequel movie. Then we had robo-calls from political candidates (and unfortunately still do). Now, we have robo-advisors.
No, these aren’t C-3PO-style robots out of "Star Wars" that sit at a desk and manage assets. Robo-advisors are investment management platforms that rely on sophisticated computer programs. These programs design portfolios composed of stocks and bonds, based on clients’ risk tolerance, goals and time horizon, as gleaned from questionnaires that clients fill out. The programs automatically rebalance portfolios, restoring them to their original asset allocations when they get out of whack because some assets have moved more in value than others. It’s a digital way to set a portfolio and forget it.
This new platform is being offered by several new firms founded on it, though some established advisory firms –- ones that have long been offering traditional services -- are now beginning to offer robo-advice as an alternative or combined with traditional services. Some estimates hold that robo-advisors now have about .5 percent of U.S. assets after just a few years in existence, and these assets are growing apace. By one estimate, this figure will probably grow to more than 5 percent by 2020.
Before robo, about the only option for people seeking low-cost advice was to consult an advisor by the hour. But this option is for people who want to manage their own investments, and many advisors don’t work this way. With robo, the computer actually does the work.
Not surprisingly, robo-advice is attracting young investors, with Gen-Xers comprising more than two-thirds of all robo-clients. However, there are statistical indications that the platform holds allure for much older investors. One study found that baby boomers are as likely to be engaged with robo-advice as millennials, though millennials usually have a low participation rate in any type of advisory service because they lack disposable income to invest.
Robo-advice holds some distinct advantages, including:
Doubtless, robo-advice will become increasingly sophisticated, offering more choices and detail as better computer programs are created for the industry. But some investors will probably still want traditional advice tailored to their unique situations or regarding goals that defy quantification.
Regardless, the current surge of robo-advice is already changing the advisory industry landscape. The low fees are prompting many who might not otherwise have a balanced portfolio –- or, in some cases, any portfolio -– to invest. There’s no question that the impact of robo-advice will be far more profound in the coming years, as more investors sign on and as traditional advisors start to offer it as another arrow in their quiver to be used along with the human touch.
Any opinions expressed in this column are solely those of the authors.
Jamie Cornehlsen and Ted Schwartz are advisors with Capstone Investment Financial Group in Colorado Springs, Colo. Cornehlsen is also president of Dunn Warren Investment Advisors in Greenwood Village, Colo. A Certified Financial Planner®, Schwartz advises individuals and endowments. He holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at email@example.com. Cornehlsen, a Chartered Financial Analyst®, advises business owners and employees on retirement plans. He holds a B.A. from the University of Colorado and an M.B.A. from the William E. Simon School of Business at the University of Rochester. He can be reached at firstname.lastname@example.org.