The rise of robo-advisors and what it means for the future of wealth management
John Leeming CFP®

Technology has shifted the approach of nearly every industry over the past decade, and the field of wealth management certainly hasn’t been immune to its influence. The use of automated investing has surged, with robo-advisors now managing more than $50 billion in assets. However, many financial experts are questioning the effectiveness of this approach for investors with more personalized, long-term needs.

Robo-advisors surfaced in 2008, emerging from the financial rubble of the recession and touted as an asset-allocation option for the masses. The service builds client portfolios, mostly consisting of exchange-traded funds, through algorithms and short online surveys that estimate investors’ risk tolerance. While robo-advisor proponents laud the affordable fees and low minimums, this bargain comes with a significant forfeiture — investors do not have access to a human financial advisor unless they’re willing to pay higher fees. All transactions and related activities are computer-based; an approach that lacks customization and discounts the intricacies of human interaction and face-to-face discussions. With an automated system, there’s no ability to discuss the sensitivities and minutia of a person’s life that might prompt an advisor to explore a different investment strategy. How can you communicate through a multiple-choice questionnaire that you might soon be a first-time grandparent, or that you’re considering delaying your social security benefits? For most investors, a canned approach simply isn’t an effective way to meet their financial needs.

The efficacy of robo-advisors during a market downturn has also yet to be proven. It’s easy to flourish in a rising market; it’s far more complicated to seamlessly navigate a downturn like we saw a decade ago. When the market dips, who do you want guiding your interests — an automated system with little-to-no personal interaction, or a trusted, experienced advisor who can advance a strategy that’s tailored to your unique goals and comfort level? Investment advisors know you personally and can offer invaluable counsel during times of uncertainty.

Additionally, while some robo-advisors are expanding their services beyond simple asset allocation — a move that is generally accompanied by an upsurge in fees — they are unable to provide the full spectrum of wealth management guidance desired by most investors. On the other hand, many investment advisory firms can offer detailed, expert advice about retirement planning, trusts, charitable foundation accounts, profit sharing and other investment alternatives.

Before picking any investment advisor, consider your own financial needs and goals. If you’re looking for a comprehensive, personalized approach to securing your future, a human advisor is the clear choice.