Robo Advisors An Evolving Field

Robo Advisors An Evolving Field

The concept is changing shape to meet increasingly complex customer needs.

Reviewed by: Gerrard Cowan
Edited by: Gerrard Cowan

Robo advisors have a wealth of untapped potential, according to industry experts, not the least due to demand for more sophisticated services from younger investors. The industry is looking to expand, with some keen to combine algorithms with the human touch and others doubling down on automation.

While dozens of robo advisors have launched over the past five to 10 years, there has been “a bit of a shakeout” recently, says Skip Schweiss, national president of the Financial Planning Association, with a handful of firms attracting much of the interest in the space. While many are well-known, they have plenty of room for growth, he says, notably in expanding the financial advice they provide, in areas from student loans to budgeting. 

When people engage with a financial advisor today, it is typically later in their working life, when they have a relatively high level of accumulated assets and a good income, notes Schweiss. 

However, this is only “a small slice of society,” he says. There’s a far bigger segment that needs financial advice in a range of areas, who may be unwilling to go to a certified professional planner (CFP). While many robo advisors are targeting such markets, there’s great potential to expand much further, according to Schweiss: “[These investors] need the help. Digital tools can do that, but I don’t think we’re there yet.”

Younger Demographic
Wealthfront is one of the biggest brands in the robo advisor space, with services in banking, investing, borrowing and financial planning. The company’s clients have always skewed younger, says Kate Wauck, its chief communications officer, with about 75% age 40 or below, and an average age of 34.

Wealthfront’s clients tend to be relatively well off, with an average income of about $120,000 and a liquid net worth of the same level. However, they don’t want to use a financial advisor, she says, for a variety of reasons. For example, they don’t meet the minimum asset requirements, or they prefer to use a software-based approach with lower costs.

The growing interest in investing among young people—exemplified by the recent “meme stock” craze—has shown up in Wealthfront’s AUM, Wauck notes. In March 2021, the firm had one of its highest net deposit months so far, not including market appreciation, though she didn’t provide a specific figure.

The company intends to expand its suite to meet these users’ evolving needs, but will do so using automated tools, Wauck says. The goal is to “become a full-suite wealth manager to people 40 or under. … As their needs change and grow, we’re going to find a way to add services that address those needs.”

Wauck notes that while Wealthfront has in-house experts that customers can consult, most clients tend to stick to its online platforms. The robo advisor tools are already close to replicating many of the services offered by human advisors, she posits, and in some ways, offer an advantage, such as the ability to continuously update and analyze financial statements in real time.

Hybrid Model
Others believe the future will see a mix of automated and human elements. Edelman Financial Engines was among the first firms (through its Financial Engines predecessor) to launch a robo advisor service, with an “Online Advice” offering in 1998 enabling employees to manage their 401(k) and outside accounts. It currently offers a range of advice and management tools.

However, “We’ve always believed that a ‘robo’ is a capability, not a business model as a stand-alone offering,” explained Jason Van de Loo, head of retail for Edelman Financial Engines.

While the services continue to be popular with “DIY-ers” who want validation from an independent tool, the firm has learned over time that the robo can only take a person so far, that most customers want to migrate to a more high-touch service. The robo adviser has augmented its engines over the past decade or so with increased access to advisors to amplify human connections, Van de Loo notes.

This demand was underlined by the COVID-19 pandemic, he says. While robos work well for those with less complexity in their financial lives, an advisor connection “can provide immense peace of mind and the emotional intelligence not available with a pure robo,” something that came through during the pandemic, he says.

Choices For Investors
Vanguard offers two digital advice services for U.S. investors. Personal Advisor Services combines an automated portfolio management system with access to a human advisor, while Digital Advisor is an all-digital financial planning and money management service.

These services have different investors in mind. Personal Advisor Services is targeted at clients who are nearing or entering retirement and may need support with drawdown strategies or building estate plans, says Brian Concannon, head of Vanguard’s Digital Advisor.

On the other hand, Digital Advisor is aimed at younger individuals. However, the new service—launched in May 2020—has embraced the trend toward increasingly wide-ranging financial planning services, providing guidance on paying down debt, setting savings goals and more.

“Millennials, for example, are often facing big life decisions with significant financial consequences, such as going to grad school, paying for a wedding, saving for a first home and having children,” Concannon explained. “Perhaps they haven’t built an emergency fund, are dealing with credit card debt and student loans, or haven’t prioritized saving enough for retirement.”

Broad Menu Needed
There’s no single approach that will define the future of the sector, says a spokesperson for Schwab, which offers several robo advisor services, including Schwab Intelligent Portfolios, which builds and rebalances a portfolio of low cost ETFs for clients, and Schwab Intelligent Portfolios Premium, a hybrid service that combines automated investing with unlimited access to CFPs for planning. 

Schwab expects to see an evolution of robo advisors in an effort to meet changing investor needs, driven by the continuing rise of young investors and other trends. However, the company believes there’ll continue to be a mix of fully automated services with those supported by CFPs, reflecting the varied nature of investor demand.

“We have clients with preferences across the board. Some prefer automation, some prefer a person and many prefer a combination,” the spokesperson said.

Gerrard Cowan is a freelance journalist who writes on finance and technology. He previously worked at The Wall Street Journal, where he edited the Business & Finance section of the European edition, and at Jane's Defence Weekly. Gerrard is the author of “The Machinery” fantasy novels, published by HarperCollins.