Robo-Advisors: Has Automated Advising Already Peaked?

June 1, 2016
Shirley Mueller, MD

The advent of so-called robo-advisors -- cheaper than a real human and theoretically just as competent -- hasn't been the game-changer some expected.

Though robo-advisors may fade in future years, they could leave us with a valuable legacy.

Can investors give up the good feelings a mortal imparts in exchange for paying less for financial advice?” That is a question I asked in an earlier column about the use of robo-advisors, Internet services that deliver programmed computer-generated portfolio management, some with minor human intervention and others with none. My conclusion, “When people can make money by saving it, they frequently choose that option; they (robo-advisors) are here to stay.”

As it turns out, this conclusion may have been premature. Robo-advisors may not be here to stay. This is according to Michael Kites in his May 2 column, “The B2C Robo-Advisor Movement Is Dying, But Its #FinTech Legacy Will Live On!” “B2C” refers to business-to-consumer marketing as opposed to B2B (business-to-business) marketing. Firms that offer robo-advisors advertise directly to consumers; thereby, they are B2C. FinTech refers to financial technology that strives to make financial services more efficient.

Kites tells us that the cost of gaining a client for robo-advisors such as Betterment and Wealthfront is higher than the value of the client to the company over the client’s lifetime (meaning that they are losing money). This is because their customers tend to be weighted toward small accounts, which do not produce much revenue for the companies in their lifetime. As an example, Betterment’s average account size has remained about $20,000 since the fourth quarter of 2014. Evidently, Wealthfront has not done much better. Without the streaming revenue from larger accounts, robos will be forced to fade and almost certainly finally die out.

Nevertheless, Kites says, even if robos perish, they will have a place in the history of financial planning. This is because they challenged the investment industry with their novel computerized approach and thereby jolted it into investing in new software similar to that of robo-advisors. This created a revolutionary product for clients which Vanguard and Schwab are already using. Thus, in combination with the traditional touch of established investment companies, a morphed robo-advisor software is making an impact on the industry, though not in the package in which it was originally conceived.

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