Financial Planning, Retirement

Few Investors Are Familiar With Robo-Advice

8/3/16 8:00 AM

iStock_83195615_SMALLc2.jpgWhat is a robo-advisor? A new report from Gallup and Wells-Fargo suggests that many Americans likely do not have an answer to that question. Specifically, just 5 percent of surveyed U.S. investors with $10,000 or more in investments said that they have heard or read “a lot” about robo-advisers, while 55 percent reported that they know “nothing” about this topic. For clarification, the term “robo-advisor” is typically used to refer to the growing class of digital tools designed to provide financial advice or portfolio management over the internet with minimal human intervention. A robo-advisor makes decisions based on an algorithm (often derived from the same software used by traditional financial advisers) but the robo-advisor usually does not provide guidance on the more personal aspects of wealth management, e.g. taxes and estate planning.

Sixty-three percent of surveyed investors who reported having at least some kind of familiarity with robo-advice said that they believe it can provide financial guidance at a lower overall cost than a traditional advisor. However, respondents seem to be quite willing to overlook potentially higher fees because a majority of surveyed investors said that they believe a human can do a better job of:

  • Simplifying the investment process
  • Being reliable in a turbulent stock market
  • Aligning clients’ investments to their risk tolerance
  • Focusing on investors’ best interests
  • Making good investment recommendations
  • Taking each client’s entire financial picture into account
  • Helping people understand their investments

Another factor likely behind the overall low level of familiarity with robo-advice is that many investors rarely take advantage of the online tools already available to them. For example, less than half of surveyed investors said that they have gone online to make changes to their portfolio holdings (46 percent), rebalance their investments (45 percent), or calculate their retirement needs (46 percent). General online banking was also quite slow to catch on, and Devon McConnell, head of Digital for Wells Fargo, added that “Automated investing tools are still in their infancy … similar to online shopping ten years ago, there is an adoption curve and we anticipate the same pattern will unfold as more investors become familiar and comfortable with these new ways of investing.”

One thing supporting McConnell’s optimistic outlook is that many surveyed investors appear to see value in technology. More than half (54 percent) of respondents, for instance, said that they would feel more comfortable receiving advice from a financial advisor with a good website, apps, and digital investing tools than a seemingly less tech-savvy advisor. Such a preference was found to be even greater among younger investors (63 percent for investors under 50 vs. 48 percent for investors 50 and older). Regardless of current sentiment, large financial institutions are not waiting around to see if automated investment advice ultimately catches on, and are instead already starting to develop their own sophisticated digital tools for clients. Some firms have created their own platforms from the ground up, while others have utilized partnerships or outright acquisitions to deal with potential competition and expand their digital offerings.

A recent example is Fidelity Investments, which last week launched its robo-advisory service, Fidelity Go, and the company announced plans to develop a similar service to be offered to independent financial advisers who use Fidelity for custodial and other services. The latter is not surprising since there is a lot of room for growth in this particular arena with only 8 percent of registered investment advisers (RIAs) currently using some form of robo-advice, and 20 percent planning to offer it to clients within two years. On a broader scale, such investments have already paid off for several financial institutions, such as Charles Schwab, which experienced a jump in total assets under management after it launched a robo-advisor of its own in 2015.



Sources: Gallup, Wells Fargo, Investopedia, Wikipedia, NAPA, IBD, CNBC

Post author: Charles Couch