How Robo Advisors Are Impacting Investing

April 28, 2014

Corporate Insight’s Grant Easterbrook breaks down the segment, and sheds light on what’s in it for investors.

The growing segment of so-called robo-advisors is far more vast and diverse than the moniker suggests. They are not a one-size-fits-all solution that applies to all investors.

Grant Easterbrook, senior researcher for Corporate Insight—a consulting and intelligence firm—spent a few years researching and connecting with 120-plus of these relatively off-the-map online advisory firms. He published an extensive report that breaks down this multibillion-dollar burgeoning industry into 10 different categories, each offering investors an entirely different set of services. Think things from algorithm-based investing to online managed accounts to trade mimicking platforms.

That diversity offers plenty of opportunities for investors looking for all kinds of help with their portfolios, but it also poses a daunting task of understanding what’s out there and knowing how it can best serve you.

We caught up with Easterbrook to discuss some of the major trends shaping this startup industry, as well as to understand the benefits and pitfalls of bypassing a traditional advisor or money manager. In the end, what’s abundantly clear is that online advisories are here to disrupt the norm in the traditional wealth management space, and reshape the way we invest. We're seeing a massive proliferation of these online-based financial advisors and investment tools. What’s driving the growth of this segment?

Easterbrook: A lot of these firms can be grouped into a post-financial crisis generation of startups. In the aftermath of the crisis, a lot of venture capitalists and entrepreneurial minds got their eyes set on the investment industry, on personal finance.

They saw the major players were battening down the hatches, trying to survive in an industry that was perceived to have a lot of flaws. They saw an opportunity to offer an online-only service that’s lower cost. The idea was that people were so burned out by their advisors or their institutions they just might consider trusting a new online service. You looked into more than 100 of these firms, and you broke it down into 10 different categories of various services and tools they provide. Still, it struck me that, in general, most of them point investors toward passive index investing. What do you make of that?

Easterbrook: For the most part, they're trying to be competitive on low cost. To do that, they emphasize passive investing.

And if they're not using any human touch, it's almost easier, too, to put forward passive management rather than try to explain and justify why they think this or that active fund is better than the passive option. There are a few exceptions in there, but for the most part, these firms are certainly favoring passive options. ETFs, then, play a central role in the growth of this online advisory industry?

Easterbrook: Certainly. One thing that's changed in this generation of startups is that ETFs have come front and center, with more and more investors using them. They’re more comfortable with them now than they were, say, in 2006.

A lot of these firms are using low-cost index ETFs to minimize costs, because that's one thing you can control; performance is out of your control, but you can minimize costs with ETFs.



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