COVID19 Brings Robo-Advisors and Financial Advisors to a Face Off
September 23, 2020 | Joyce Ibrahim
Eight months into the pandemic, we have seen global economies slow down, stock markets suffer, small and large businesses close, and our behaviors change. Interaction and spending habits, specifically, have significantly changed over the last few months.
With health and safety precautions taking center stage of every aspect of daily life, consumers increasingly sought services that offered reasonable efficiency with minimal human interaction. Additionally, market volatility during times of crisis push investors towards offerings with lowers fees, smaller opening balances, and a passive investment strategy. This rising and pressing need for low-cost automated services was clearly reflected in the performance of robo-advisors since the start of the crisis. Subscriptions to robo-advisory services reached an all-time high in Q1 2020, with a 3.1% increase in subscribers across providers. Major industry players thrived amid the market crash, with Vanguard recording a 14% growth in assets under management, and Wealthfront reporting a 68% leap in account openings.
What are robo-advisors and how do they compare to financial advisors?
Robo-advisors are trading and investing platforms that digitally build and maintain financial portfolios with little to no human interaction. Algorithm-driven wealth management services are gradually taking up additional space in the trading sphere, and offering more and more services that had been performed by humans thus far. However, human input remains a major factor in investing, especially in challenging market conditions, a factor which robo-advice lacks.
Here are the key considerations that set robo-advice and human financial advice apart.
In a nutshell, robo-advice is democratizing investing through low fees and accessible opening balance requirements. Most providers charge fees from 0.25% to 0.50% of assets under management per year. In contrast, financial advisors typically charge 1% to 3%, with additional costs incurred on commission-based accounts. Additionally, robo-advisors make investing possible for almost anyone, as the minimum assets required can reach as low as 0$ on some platforms. On the other hand, human advisors tend to prefer to take on clients with sizeable investable assets and a readiness to pay for more diverse wealth management services. In terms of cost, robo-advice may be especially attractive to novice investors or those seeking low-cost passive income solutions.
Robo-advice was built around passive wealth management, and allows investors to set up their portfolio with great ease, directly from their computer or smartphone. In light of the pandemic, automated operations are an increasingly sought-after feature. Eliminating human interaction from their process, robo-advisors only require that users fill a risk-profiling survey to match them with an investor portfolio within minutes.
Additionally, robo-advisory requires minimal knowledge in investment. Utilizing automated investment strategies like modern portfolio theory, they are able to optimize and rebalance portfolios automatically. The algorithm does all the choosing and investing based on investors’ risk preference, such that they have little research and oversight to do. Such services are more efficient for those still amassing income to invest, while those with more significant investable assets will find financial advisory to be more valuable.
Control & Customization
With little personal interaction comes little room for personalization. While robo-advisors make great portfolio managers, they rarely address other important aspects of an individual’s financial life. Many platforms rely on very basic questions around applicants’ financial situation and risk-level, and fail to take broader concerns into consideration.
Robo-advisors apply general criteria to select and recommend portfolios, and in many cases fit their customers into preset model portfolios. What’s more is that these services usually invest in low-cost exchange-traded funds and index mutual funds, without much room for investors to select the funds they would like to include in their portfolio.
Financial advisors, however, work with their client to understand their overall financial situations, short-term and long-term goals, educate them on their investments, and offer advice that fits their individual circumstances. In an unstable global economy, financial advisors can prove to be more helpful than automated advisory in supporting clients with financial planning. Advisors align your investments to your specific situation, insurance, and estate planning needs, and update your financial plan with every change in your life that may affect your finances.