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Robo advisors are rising in recognition. Can they actually change a human monetary advisor?

Robots want to be your next financial advisor.

Not so long ago, that notion might have smacked of sci-fi whimsy — Star Wars cyborg C-3PO in a power suit on Wall Street might.

But robots, or so-called "robo-advisers," could soon be managing more than $1 trillion of Americans' wealth.

These aren't really tangible robots; They are algorithms that companies have developed to automate digital investments. Enter a few details (age, savings goals, risk comfort) into a computer or phone app and the algorithm will assemble and manage a personalized investment portfolio just for you.

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But is a robo advisor right for all investors? Is a human better equipped for the task of money management and financial planning?

"It's appropriate for some people and not for others," said Ivory Johnson, a board-certified financial planner and founder of Delancey Wealth Management in Washington, D.C., of robo-advisors. "When you play golf, it's just another golf club.

"Sometimes I use my 7 iron and sometimes I don't – it just depends on where I am."

'They are everywhere'

Robo-advisors for the everyday investor started popping up around 2008, a year after the iPhone made its public debut.

A little over a decade later, robo-advisors managed around $785 billion, according to Backend Benchmarking, which specializes in research into digital advisors.

Dozens of companies have developed their own models to capitalize on popularity and a rising digital culture.

These include independent businesses like Betterment, Personal Capital and Wealthfront; traditional Wall Street brokers like Fidelity Investments, Merrill Lynch and Morgan Stanley; and the likes of Financial Engines, which cater to 401(k) plan investors.

Established players, who have historically focused on an older, more affluent client base, can also use the technology to woo a new class of younger investors, investing in online stock trading apps like Robinhood and for assets like cryptocurrencies for the digital market Inspire the financial sector.

"They're everywhere now," said David Goldstone, research and analytics manager at Backend Benchmarking, of robo-advisors. "Almost every major bank and discount broker has launched such a provider in the last ten years."

Who is a good candidate?

According to industry experts, robots tend to be particularly well-suited to newer investors who haven't built a lot of wealth yet and who want to outsource money management to a professional for a relatively low cost.

For one, robo-advisors offer a low barrier to entry due to low or non-existent minimum accounts.

Acorns, Fidelity Go, Betterment and Ellevest, a robo-service for women, allow customers to sign up for their basic digital service with no prior assets. Merrill Edge Guided Investing, SigFig, SoFi, Vanguard Group, and Wealthfront have minimums ranging from a few dollars to $3,000.

Meanwhile, traditional businesses tend to manage money for clients with at least $250,000, Goldstone said.

Perhaps unsurprisingly, the average robo user is younger. For example, about 90% of Wealthfront's 470,000 customers are under the age of 40, said Elly Stolnitz, a company spokeswoman. Their average balance is about $60,000.

I think it attracts people who want to delegate management of their portfolio.

Dan Egg

Vice President of Behavioral Finance and Investments at Betterment

This demographic trend is also a function of greater digital affinity among Millennials and Gen Z, who grew up largely digital natives and may therefore be more interested in a robo-service.

"(Our users) want to be able to manage money the same way we do other things, like (online grocery delivery via) DoorDash," Stolnitz said.

Betterment also has an average user under the age of 40 with a $55,000 to $60,000 account, according to Dan Egan, vice president of behavioral finance and investing.

But age and wealth aren't the only factors at play, he said. The firm has clients in the '60s and '70s with multimillion-dollar portfolios; The oldest user is over 90.

"I think it attracts people who want to delegate management of their portfolio," Egan said.

Fees for this administration are typically much lower than a traditional financial advisor, who charges 1% per annum on client assets. The typical robo charges 0.25% to 0.35% annually for its consulting service — about a quarter of the cost, Goldstone said.

In dollar terms, this means that a $100,000 investor would pay a typical human $1,000 a year for their services and $250 to an average robo. (Of course, not all human advisors charge a 1% fee. For example, some have switched to monthly subscription fees or one-time advisory fees.)

Some robo-advisors like Charles Schwab and SoFi do not charge an advisory fee; others like Fidelity and SigFig only charge for balances over $10,000.

Investments in the portfolio – often low-cost index mutual funds or exchange-traded funds – carry an additional fee. Some companies invest clients in their branded funds, which increases their revenue through fund fees. They may also charge higher account minimums or tiered service level fees.

"If you don't have a lot of money, you're in your 20s and 30s, the portfolios are pretty darn good," said William Whitt, a strategic advisor at Aite-Novarica Group, a consulting firm.


Using a purely digital service can involve compromises.

While digital services do a good job of automating key investment functions (such as fund selection, stock-bond cash mix, and regular portfolio rebalancing), human advisors lament the relative inability of algorithmic programs to guide clients through situations when needed.

This can include the reasoning behind a particular strategy recommendation or holding during scary times like job losses or a falling stock market.

Financial planners also believe they are better suited to be proactive and address the needs of some clients that go beyond money management – whether tax, estate or business planning, which may prove too complex for an online questionnaire or can prove nuanced.

"We do a lot more than just investing," said Johnson of Delancey Wealth Management.

Assisting a client in deciding whether to exercise stock options, obtain long-term care or liability insurance, or form a business as an LLC or any other type of entity is probably beyond the scope of a digital consultant, Johnson said.

Alistair Berg | Digital Vision | Getty Images

Automating customer psychology is also a challenge.

The online questionnaires that robo-advisors use to determine the best portfolio for a client can't examine responses and body language in the way a human advisor could, Whitt said.

Even determining what makes a customer happy — essentially the purpose behind their money — may be beyond the capabilities of robots, according to some experts.

"Financial advisors can ask follow-up questions to fill in and understand a picture," Whitt said.

The Securities and Exchange Commission, which recently conducted a review of robo-advice services, also questioned whether they always recommended appropriate portfolios given clients' stated appetite for risk. (The agency didn't name specific companies it was investigating.)

Of course, not all human advisors necessarily perform these functions adequately either. Some may just manage customer investments without assessing goals or other complex financial planning details – and in this case, customers can derive more value from a robo-advice relationship.

"I think there's value that people bring," said Brian Walsh, SoFi's senior manager of financial planning. "But on the investment side, I think robos have a big advantage because they're cost-effective."


Robo platforms have also evolved to address some criticisms and appeal to a broader pool of investors.

For one, many have expanded to offer more sophisticated levels of “goal-based” planning; You can compile investment and savings recommendations based on short and long-term goals, such as saving for a home, vacations, college funds, or retirement.

Many are now offering a "hybrid" offering that provides access to one-time interactions with a financial planner or even an ongoing relationship with a human advisor.

Charles Schwab's premium service, for example, charges $300 upfront for a planning consultation and a $30 monthly subscription fee for access to human advice that complements digital asset management.

Even at Wealthfront — which sees it as a "fault of our product if you have to call us" — users can call a hotline to speak to accountants, CFPs and financial analysts if they have a question, Stolnitz said.

Ultimately, whether a robot or a human is managing your money depends on what an investor expects from the relationship.

"I think robo-advisors are good — they give investors more options," Johnson said. "I would hate a world where people could only invest in one direction."

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

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