The emergence of robo-advisors is considered as a disruptive force destined to transform the investment banking industry. Robo-advisors, also called robo-investors, are online portfolio management solutions and form the next big innovation in the area of digital banking and investment. Triggered by gains of significant cost-savings, a number of financial advisory firms are betting big on the deployment of robo-advisors to offer investment advice in the best interest of their clients.
Betterment Holdings Inc., a firm based in New York offering automated investment service, is one of the companies at the forefront to capitalize on the potential of robo-advisors. The online investment firm currently manages assets with a value over US$8.5 billion and employs a mix of automated wealth management methods.
Reasons Galore for Investors to Seek Service of Robo-Advisors
Robo-advisors use a series of computer algorithm to gather and analyze financial goals of investors, offer advice to clients, thereby automatically rebalancing their portfolio assets and funds.
Dan Egan, the company’s director of Behavioral Finance and Investments, put forth compelling reasons for investors to trust their asset management with robo-advisors, rather than with human investment advisors or brokers.
The United States Department of Labor has in 2016 implemented the fiduciary rule between clients and retirement brokers, which requires these brokers to work in the way that puts clients’ interest first. According to Egan, incorporating a legal binding was a welcome move by the Department of Labor. However, this opened a can of worms for investors. The fiduciary rule revealed to investors in no unclear terms that human brokers are increasingly prone to offer products or services that work in the interest of brokers. This forms one of the potential reasons for the shift.
Robo-Advisors Attract Clients with Variety of Financial Objectives
Having said that, firms offering robo-advisor services does include human intervention. Betterment employs a team of in-house certified financial planners who not only apply computer algorithm to make financial planning but may communicate with the customers if required. However, the annual fees charged for this premium service by human planners range between 0.4 and 0.5 %. As Egan contends, a variety of exciting financial goals of clients feed their motivation to seek services of robo-advisors. Planning a trip to space in the next 10–15 years, through far-fetched, is one of the elusive financial goals piquing the imagination of investors.
Several financial service providers have upped the ante in this disruptive technology in digital banking. Players such as E-Trade, Fidelity, TD Ameritrade, and Charles Schwab Corporation either plan to or have launched their own robo-advisors to automate management of clients’ portfolio.