Since launching more than a decade ago, robo-advisors –
online investment services that offer financial advice driven by algorithms –
have grown into an industry that managed $460 billion in 2020.
That’s a 30% increase from 2019.
Some analysts predict robo-advising will become a $1.2
trillion industry by 2024.
“Investors historically have had two options when it comes
to managing their investments. They could do it themselves through something
like an online broker or you can work with a financial advisor,” said Brian
Concannon, head of digital advisor at Vanguard.
“Now, with the advent of robo-advisors, there’s a third
option, and that’s to merge the benefits of professional money management and
advice with the convenience of an all-digital application,” he said.
Robo-advisors’ sudden rise to prominence was made possible
due to massive interest and support from millennials and Gen Z. According to a
recent survey by Vanguard, millennials were twice as likely as young baby
boomers to consider using a robo-advisor for investments.
“I believe that there are things that technology or
algorithms can do better than humans can,” said Taylor Crane, a robo-advisor
customer. “And I have no problem trusting a software to do that.”
Skeptics do not expect robo-advisors to replace human
advisors entirely in the near future.
“Clearly, there’s always going to be a human element that’s
missing,” said Jason Snipe, chief investment officer at Odyssey Capital
Advisors. “My problem always will be the emotional response. Take a situation
like last year when we’re going through Covid-19 and markets are moving a lot,
dramatically. ... You can’t talk to the technology, right?”
To combat this, many robo-advisor companies including
Betterment and Vanguard began providing the option of hybrid services that
combine human and digital advice.
″[Some] investors we see crave validation from a financial
advisor,” said Concannon. “So for those investors, being able to pick up the
phone and have a video conference with a financial advisor, have a discussion
about their needs and wants, goes an incredibly long way to providing them the
peace of mind that they so desperately need.”
Time is on the side of the robo-advisory industry as the
technology continues to improve and the younger generations accrue more wealth.
“I think some combination of the two probably is where we
are headed for in the future,” said Snipe. “I think the robo space has room to
grow. I think it will obviously modify and change and become even more
sophisticated.”
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