Robo-advisors are growing in popularity. Can they replace a human advisor?

Robots want to be your next financial advisor.

Not so long ago, this notion might have sounded like science fiction fantasy – the C-3PO cyborg from “Star Wars” in a power suit on Wall Street, perhaps.

But robots, or so-called “robo-advisers,” could soon manage more than $1 trillion of Americans’ wealth.

They’re not really tangible robots; these are algorithms that companies have developed to automate digital investing. Plug certain details (age, savings goals, risk comfort) into a computer or phone app and the algorithm assembles and manages a personalized investment portfolio just for you.

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But is a robo-advisor suitable for all investors? Is a human being better equipped for the task of money management and financial planning?

“It works for some people and not for others,” Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, DC, said of robo-advisors. “If you play golf, it’s just a different golf club.

“Sometimes I use my 7 iron and sometimes I don’t – it just depends on where I am.”

“They are everywhere”

Robo-advisors for the everyday investor started appearing around 2008, the year after the iPhone made its public debut.

Just over a decade later, robo-advisors were managing an estimated $785 billion, according to Backend Benchmarking, which specializes in digital advisor research.

Dozens of companies have built their own models to capitalize on popularity and a rising digital culture.

They include independent stores like Betterment, Personal Capital and Wealthfront; traditional Wall Street brokerages like Fidelity Investments, Merrill Lynch and Morgan Stanley; and those like financial engines that cater to 401(k) plan investors.

Established players who have historically focused on an older, wealthier clientele may also leverage technology to woo a new class of younger investors, who have shown enthusiasm for the digital financial realm via stock trading apps. online like Robinhood and for assets like cryptocurrency. .

“They’re everywhere now,” David Goldstone, head of research and analytics at Backend Benchmarking, said of robo-advisors. “Almost every major bank and discount broker has launched one over the past decade.”

Who is a good candidate?

Robots tend to be particularly well suited to new investors who haven’t yet built a lot of wealth and want to have their money managed by a professional at a reasonably low cost, according to industry experts.

For one thing, robo-advisors offer a low barrier to entry, due to low or no account minimums.

Acorns, Fidelity Go, Betterment and Ellevest, a robotic service for women, allow customers to sign up for their basic digital service without any prior wealth. Merrill Edge Guided Investing, SigFig, SoFi, Vanguard Group, and Wealthfront have minimums ranging from a few dollars to $3,000.

Meanwhile, traditional companies tend to handle money from clients with at least $250,000 to invest, Goldstone said.

It’s perhaps no surprise that the average robo user is younger. For example, about 90% of Wealthfront’s 470,000 clients are under 40, said company spokeswoman Elly Stolnitz. Their average balance is around $60,000.

I think that attracts people who want to delegate the management of their portfolio.

Dan Egan

Vice President of Behavioral Finance and Investing at Betterment

This demographic trend is also a function of a greater digital affinity between Millennials and Gen Z, who have largely grown up as digital natives and therefore may be more attracted to a robotic service.

“[Our users] want to be able to manage money the same way they manage other things, like [online food delivery via] DoorDash,” Stolnitz said.

Betterment also has an average user under 40, with an account between $55,000 and $60,000, according to Dan Egan, the company’s vice president of behavioral finance and investments.

But age and wealth aren’t the only factors at play, he said. The company has clients in their 60s and 60s with multi-million dollar portfolios; the oldest user is over 90 years old.

“I think it appeals to people who want to delegate their portfolio management,” Egan said.

Management fees are typically much lower than a traditional financial advisor charging 1% per year on client assets. The typical robo charges 0.25% to 0.35% per year for its advisory service, about a quarter of the cost, Goldstone said.

In dollars, this means that an investor with $100,000 would pay the typical human $1,000 per year for his services and the average robot $250. (Of course, not all human advisors charge a 1% fee. Some have moved to monthly subscription fees or one-time consultation fees, for example.)

Some robo-advisors like Charles Schwab and SoFi charge no advisory fees; others like Fidelity and SigFig only charge balances over $10,000.

Portfolio investments — often low-cost index mutual funds or exchange-traded funds — incur additional fees. Some companies invest their clients in their branded funds, which increases their revenue via fund fees. They may also charge account minimums or higher fees for tiered service tiers.

“If you don’t have a lot of money, you’re in your 20s and 30s, portfolios are pretty darn good,” said William Whitt, strategic adviser at Aite-Novarica Group, an advisory firm.


Using a purely digital service can lead to compromises.

While digital services do a good job of automating important investment functions (fund selection, stock-bond-cash mix, and regular portfolio rebalancing, for example), human advisors bemoan the relative inability of algorithmic programs to explain to clients conditions on demand.

These can include the reasoning behind a specific strategy recommendation, or handling in discouraging times like job loss or a cratering stock market.

Financial planners also believe they are better suited to being proactive and exploring the needs of certain clients beyond money management – whether it’s tax, estate or business planning, which may be too complex or nuanced for an online questionnaire, for example.

“We do more than just invest,” said Johnson of Delancey Wealth Management.

Helping a client choose whether to exercise stock options, purchase long term care or liability insurance, or start a business as an LLC or another type of entity goes beyond likely part of a digital advisor, Johnson said.

Alistair Berg | Digital Vision | Getty Images

It is also a challenge to automate customer psychology.

The online questionnaires that robo-advisors use to determine the best portfolio for a client can’t probe responses and body language the way a human advisor could, Whitt said.

According to some experts, even figuring out what makes a customer happy — in essence, the purpose behind their money — can be beyond the reach of bots.

“Financial advisors can ask follow-up questions to fill in a picture and understand,” Whitt said.

The Securities and Exchange Commission, which recently conducted a review of robo-advisory services, also questioned whether they still recommend appropriate portfolios given clients’ stated risk tolerance. (The agency did not name the specific companies it reviewed.)

Of course, not all human advisors perform these functions appropriately either. Some may simply manage clients’ investments, without assessing goals or other complex financial planning details – and in this case, clients may derive more value from a robo-advisory relationship.

“I think humans add value,” said Brian Walsh, senior director of financial planning at SoFi. “But on the investment side, I think robots have a huge advantage in being profitable.”


Robotic platforms have also evolved to accommodate some criticism and cater to a wider range of investors.

On the one hand, many have expanded to offer more complex levels of “goal-based” planning; they can put together investment and savings recommendations based on short- and long-term goals like saving for a home, vacation, college fund, or retirement.

Many now offer a “hybrid” offer that gives access to one-off interactions with a financial planner or even an ongoing relationship with a human advisor.

Charles Schwab’s premium service, for example, charges $300 up front for a planning consultation and a $30 monthly subscription for access to human advice, which complements its digital investment management.

Even at Wealthfront – which considers it “a failure of our product if you have to call us” – users can call a hotline to speak with accountants, CFPs and financial analysts if they have a question, said Stolnitz.

Ultimately, whether a robot or a human manages your money depends on what an investor wants from the relationship.

“I think robo-advisors are good — it gives investors more options,” Johnson said. “I would hate a world where people could only invest one way.”

Disclosure: NBCUniversal and Comcast Ventures are investors in tassels.

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