It seems everyone in the financial services industry is talking about “robos” and “robo-advice”. Here’s what you should know.  


  1. Robos are digital platforms.

Investopedia defines robo-advice like this: “Robo-advisors are digital platforms that provide automated, algorithm-driven financial and investing services with little to no human supervision. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey, and then uses the data to offer advice and/or automatically invest client assets.1

“Other common designations for robo-advisors include “automated investment advisor,” “automated investment management” and “digital advice platforms.” They are all referring to the same consumer shift towards using fintech (financial technology) applications for investment management.”1

  1. Robos have experienced explosive growth.

“Client assets managed by robo-advisors hit $60 billion at year-end 2015, and is projected to reach $2 trillion by 2020.”1

  1. Robo-advisors hold the same legal status as human financial advisors, and are considered RIAs.

“Robo-advisors hold the same legal status as human advisors. They must register with the U.S. Securities and Exchange Commission to conduct business, and are therefore subject to the same securities laws and regulations as traditional broker-dealers. The official designation is “Registered Investment Adviser,” or RIA for short. Most robo-advisors are members of the independent regulator Financial Industry Regulatory Authority (FINRA) as well. Investors can use BrokerCheck to research robo-advisors the same way they would a human advisor.”1

  1. There are more than 200 robo-advisors1 in the U.S., but not all are the same.

Not all robos are “standalone” branded services–some are adjunct services provided by financial custodians, mutual fund companies or other financial entities. Therefore, various combinations of investment management, financial advice and retirement planning may come as part of any robo service plan. Not all are 100% automated or artificial intelligence only–some offer help from humans.

  1. Access to robo-advisor services through a traditional financial advisor is becoming more common.*

As artificial intelligence has progressed in quality, using technology to handle certain investing services is becoming more common, often to both the advisor’s and the client’s advantage: “[Robo-investing] takes the cumbersome task of choosing assets out of [the advisor’s] hands so that the financial advisor may spend more time with their clients addressing individual tax, estate, and financial planning issues.” 2

  1. Minimum balances are required to get started with most robo-advisors.
                                                                                                                                                                                                   Chart from Investopedia 1

Minimums to open accounts with most robo-advisors are low, making them very attractive to groups like Millennials, who can’t always afford a typical financial advisor’s investable asset minimum of $100,000+.

This is not to say that robo-advice isn’t attractive to other demographic groups. “The industry is garnering interest from Baby Boomers and high-net-worth investors as well, especially as the technology continues to improve. Recent research by Hearts and Wallets shows half of investors aged 53 to 64, and one-third of retirees, use digital resources to manage their finances.”1

  1. Robo-advice may be cheaper.

“Most robo-advisors charge an annual flat fee of 0.2% to 0.5% of a client’s total account balance. That compares with the typical rate of 1% to 2% charged by a human financial planner, and potentially even more for commission-based accounts.”1

However, annual fees, hidden costs and the underlying ETF fees that a robo purchases on a client’s behalf can add up. Furthermore, certain robo requirements could reduce a portfolio’s performance, like Charles Schwab’s cash allocation requirement. Charles Schwab offers robo advice for “free,” but requires clients to keep from 6% to 30% of their portfolio in cash. Depending on the size of the account, this could mean the loss of hundreds to thousands of dollars in potential returns. 3

  1. You set it and go—with little control.

Basically, when a client signs up for a robo service, they provide initial information via online interface about their investing goals, income and risk tolerance. A computer software program then uses that to choose investments for them and rebalance assets over time. One of the drawbacks is that the client has no control over that money. They can’t customize their portfolio in any way, and most robos don’t allow them to own individual stocks. Because they are fully automated, robo advisors simply don’t have the kind of investment flexibility you can get with a traditional investment advisor.4

Per Investopedia, “If you want to sell call options on an existing portfolio or buy individual stocks, most robo-advisors won’t be able to help you. There are sound investment strategies that go beyond an investing algorithm. Sophisticated and newbie investors may want a broader investment portfolio with a wider range of asset classes than the typical robo-advisor offers.”2

  1. People still want people, mostly.

Despite the rising popularity of robo-advisors, many people still prefer working with traditional financial advisors.

  • Robos are far from sufficient for clients that need advanced financial planning services, estate planning, complicated tax management, trust fund administration and retirement planning.A robo-advisor might miss things like college savings goals or maximizing tax efficiency. Automated advisors also have limited ability to answer financial questions, such as whether you should pay off your mortgage early instead of investing.5
  • Robos can’t account for human emotions and preferences, especially when markets get volatile. “A study conducted by Investopedia and the Financial Planning Association found that consumers prefer a combination of human and technological guidance, especially when times are rough. According to the report, 40% of participants said they would be not be comfortable using an automated investing platform during extreme market volatility.” 1
  • If you can’t make any changes, the robo-advisor’s mantra “available online 24/7” becomes rather meaningless. “If you’re expecting a robo advisor to become defensive, move to cash or change approach in a downturn, this probably isn’t going to happen. A human advisor, on the other hand, can adapt and respond to ongoing market conditions or to your needs.” 5
  • Furthermore, robo-advisors operate on the assumption that clients have defined goals and a clear understanding of their financial circumstances to begin with. For many, that is not the case. Answering questions like “Is your risk tolerance low, moderate or high” presupposes the user has fundamental knowledge of investment concepts and the real-life implications of each option they choose.1
  • From a recent study, Millennials evidently prefer human financial advisors. “A poll commissioned by the loan refinancing firm LendEDU found that 46.41% of Millennials who are currently saving for retirement use a human financial adviser as opposed to only 24.30% who use a robo-adviser. More than half (62.35%) said robo-advisers are more likely to lose their money, and 51.59% said robo-advisers are more likely to make a mistake managing their money. In addition, 68.92% said human financial advisers are more likely to get a better return on investment (ROI).” 6
  • 64% of affluent Millennial investors and 48 percent of Gen Xers surveyed said they plan to allocate a greater percentage of their assets to human advisors over the next decade.5


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1 Investopedia “Robo-Advisor (Robo-Adviser) Definition.” (accessed November 27, 2017).
2 Investopedia “Pros & Cons of Using a Robo-Advisor.” (accessed November 27, 2017).
3 InvestorJunkie ” The True Costs of Robo Advisors – What Are the Annual Fees?” (accessed November 27, 2017).
4 InvestorJunkie ” Robo Advisors vs. Financial Advisors – Which One Should You Use?”  (accessed November 27, 2017).
5 U.S. News & World Report “What Human Advisors Do That Robo Advisors Can’t.” (accessed November 27, 2017).
6 Planadviser “Millennials Prefer Human Financial Advisers.” (accessed November 27, 2017).