Over the past decade, we’ve seen a rise in numerous automated investment tools hitting the market. Some of these solutions can deliver similar services that traditional financial advisors offer at a more affordable rate. The convenience and lower price point of these tools have resulted in some people making the switch. Charles Schwab estimates that robo-advisory services in American will grow from an estimated 2 million in 2018 to 17 million by 2025.
Should the growth of these Fintech solutions leave financial planners and wealth managers quaking in their boots? Or are they just a fad? This article will discuss what automated investment solutions are and the potential impact they could have on the financial planning industry.
What Are Automated Investing Tools?
Automated investing aka robo-advisors typically uses artificial intelligence and algorithms to build and manage a portfolio for you. A typical robo-advisor will collect information from a client about their financial situation, risk appetite and future goals through an online survey; this data is then used to create the ideal portfolio. The process is largely automated and requires little to no human supervision.
The Growth Behind Automated Investing Tools
Robo-advisors are popular because they’re an excellent solution for beginners or those who have long-term goals like retirement. On top of that, they’re also extremely easy to use and don’t require much money to start. FinTech firms like Betterment and Wealthfront make the investing and financial planning process as passive as possible, allowing users to get on with their everyday lives as their investments grow in the background.
The fees for a robo-advisor is also cheaper, with most charging between 0.25-50% of assets under management, significantly less than the 1% or more traditional advisors usually charge. These lower fees are another primary reason as to why robo-advisors are growing in popularity.
Will Automated Investing Tools Replace Traditional Advisors?
Although automated investing tools are significantly growing in popularity and could pose a threat to traditional advisors, it is doubtful that they’ll ever entirely displace them. Many people, especially those who have a high net-worth, prefer to have a traditional advisor who can handle their financial situation. Whether it’s a complex tax or estate planning situation, there are areas that robo-advisors can’t displace.
Many people also appreciate the human touch that advisors can provide. Clients like to be educated and feel that their money is in safe hands. A traditional advisor can do just this, and help their clients understand the best solution for them and their needs.
Automated investing tools certainly serve a purpose and are an excellent solution for those who may never have been able to afford financial advice before. However, investing is just one part of the jigsaw. As an individual’s assets start to grow, they’ll need a financial plan that addresses many things outside of investing such as taxes, structuring your estate and planning your insurance needs. Robo-advisors simply can’t offer that.
So although robo-advisors may disrupt the financial services industry, they certainly won’t be displacing all traditional advisors out of a job.