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Robo-advisors Are Taking Over Personal Finance: Here’s What That Means For You

Software, automation, and programming are rapidly changing the way we manage our lives. Not to mention they are rapidly changing goods and services. Almost every aspect of day to day life has been infused with some sort or digital automation or software driven solution. The same is true for business processes. One key area, investing and financial management, is experiencing a significant shift in automation.

Wall Street has been using algorithms, high speed cables, and computers to drive a bulk of their trading for years now. “Automated trading accounts for about 75 percent of all financial market volume”-Fortune. There is however a growing trend in the consumer investment space that stands to change the way financial institutions manage their clients money. Robo-advisors.

A robo-advisor as defined by Investopedia is… “an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners. Robo-advisors use the same software as traditional advisors, but usually only offer portfolio management and do not get involved in more personal aspects of wealth management, such as taxes and retirement or estate planning.” Check out this video from Investopedia if you’re a visual learner.

Why more firms are offering more robo-advising services

Robo-advisors manage to take on a certain persona for the human observer. While the firms that leverage this technology have financial interests, the algorithms do not, they are simply looking to solve financial problems and generate the highest return for all parties involved with the lowest risk. This gives an impression of impartiality and fairness to the user. Robo-advisors don’t have ulterior motives. The new generation of potential investors, millennials, are known for their natural distrust of institutions. Microsoft’s survey comparing millennial banking habits to those of Baby Boomers found that “millennials are much more likely than baby boomers to use Web banking (49 percent versus 35 percent) and to find online service capabilities to be very important when researching a new bank (54 percent versus 42 percent).” For this reason many people are making the shift to firms that use robo-advisors.

Cost reduction

Human advisors are costly. Most investment and financial advisors have college degrees and/or financial management certificates and therefore command a higher wage. According to GlassDoor the average Merrill Lynch Advisor makes around $62k a year. Add in benefits programs, people operations, incentives and you have a significant amount of payroll overhead that the firm now has to recover.

In cutting the number of human advisors, firms are able to significantly reduce payroll cost and shift that value back to the consumer, the firm’s profit margin, or development to help improve services/returns over time. Also robo-advisors don’t need to make money for a living, so they don’t give off that used-car or insurance salesman vibe, something consumers are quick to shy away from.

In this emerging space it’s critical that firms and consumers consider how they will shift their investing practices. Consumers will need to consider whether or not robo-advising services are right for them, and then which ones meet their needs the best. Similarly firms will need to determine whether or not they want to provide robo-advising services for their clients. If they enter into the robo-advising space they will also need to consider what kind of consumer they want to advise for.

Recommendations for firms in robo-advising

The key will be to focus on consumer segmentation and tailoring messages and strategies to each segment.


Millennials are most likely to distrust and institution and its financial representatives, however they are much faster to adopt new technologies than previous generations. Focus on explaining why the tech is innovative, how it works, and how it will benefit them.

Young Investors/Parents

Targeting the parents of young investors is a great way to create a customer with significant and more extended lifetime value. If parents are able to create easy to manage portfolios they are more likely to hand off that portfollio to their child when they are able to take over it’s management. That transition can happen sooner due to the ease of use with robo-advising.

New Investors

Customers new to investing will be naturally wary of risk, making them ideal candidates for low-minimum investment amounts that usually come with algorithmic robo-advising.

Recommendations for consumers

There are more and more firms offering quality robo-advising services. The key is to consider what you are looking to get out of the service before investing.

First Time Investor

Robo-advising is a great way for you to cut your teeth on basic portfolio management at a low cost. It is also a good option if you want to invest in higher cost human financial advising, but want to get acquainted with industry terminology before you decide what firm or services to work with.

Young Investors

Robo-advisors are great because most of them have low-minimum investment amounts. This means you don’t need to have a lot of money to start your portfolio. Get started with what you have and add more as your career advances. By the time you are making more, you will already have a good understanding of basic portfolio management.

Risk Averse Investors

Robo-advisers on the whole make lower risk investments based on algorithmic assessments of the market. This also means that the returns are likely to be smaller than they would be with a human advisor. Because you aren’t comfortable to putting much of your money on the line, the low minimum investment amounts that robo-advisors provide are ideal. You don’t have to risk a significant amount of your hard-earned assets to have a robo-portfolio.

Should Human Financial Advisors be worried?

For the time being the answer is a definite no. While robo-advisors and the firms that use them are growing in number, there is still a good segment of consumers that prefer interacting with humans, and that don’t want to trust their financial futures to a program. Additionally there have been shifts away from High Frequency Trading on Wall Street due to some problems that algo-bots (the robo-advisors of the trading floor) have created.

Additionally robo-advising does not work as well for investors with higher value portfolios that have more sophisticated needs. Considering these are also the most profitable clients for financial advisors and investment firms, robo-advisors won’t be completely replacing human advisors. What we may instead see is the continuing shift toward a world where the wealthy hire rockstar portfolio managers and everyone else have computers manage their assets.

About the author

Nick Hastreiter

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