Will Robots Replace Human Financial Advisors?

Summary

The video script delves into the rise of robo-advisors in American finance, offering a convenient, low-cost alternative to traditional financial advisors. These digital platforms use algorithms to create and manage diversified investment portfolios tailored to individual risk profiles and goals. With a significant increase in assets under management and growing popularity, especially among millennials and Gen Z, robo-advisors are revolutionizing the investment landscape. Despite skepticism, they provide a democratized and cost-effective solution, with some companies offering hybrid services to address the need for human touch during market volatility.

Takeaways

• 🤖 Automation is deeply integrated into American life, with coffee makers, apps, and AI assistants enhancing daily routines.
• 💼 The rise of robo-advisors in money management offers a technological solution to investment management, appealing to those who prefer to delegate investment decisions.
• 📈 Investors traditionally had two options: self-management or a financial adviser, but robo-advisors now offer a third, digital option combining professional advice with convenience.
• 📊 Robo-advisors have seen significant growth since 2008, with assets managed increasing by 30% from 2019 to $460 billion, and predictions of a $1.2 trillion industry by 2024.
• 🏦 Betterment, one of the first robo-advisors, has grown exponentially, managing $29 billion in assets with 600,000 customers, illustrating the industry's expansion.
• 🤖 Critics argue that robo-advisors cannot fully replace human advisers, emphasizing the need for conversational engagement alongside technology.
• 📝 Robo-advisors operate on algorithms that create diversified portfolios based on investor objectives, risk appetite, and adjust as goals evolve.
• 🔑 Convenience is a key feature of robo-advisors, offering a quick sign-up process and algorithmic investment strategies without the need for extensive user input.
• 💰 Robo-advisors typically invest passively in index funds or ETFs, which diversify portfolios and often come with lower fees than traditional advisors.
• 👥 The lower fees and accessibility of robo-advisors have made them popular among younger investors, but they also appeal to older demographics seeking passive investment options.
• 🌐 Established brokerage firms and asset management companies like Vanguard have entered the robo-advisory market, creating competition and driving innovation in the industry.

Q & A

What is the significance of automation in American life as described in the script?

Automation plays a vital role in American life, with examples ranging from coffee makers to apps for hailing cabs, and AI assistants aiding daily activities. It has also revolutionized money management through the rise of robo-advisors.

What problem does the use of robo-advisors solve for investors according to the script?

Robo-advisors solve the problem of investors preferring to trust technology to make optimal investments rather than spending time doing it themselves or acknowledging their inability to perform better than an algorithm.

What were the traditional options for investors before the advent of robo-advisors?

Before robo-advisors, investors had two options: managing their investments themselves or working with a financial adviser.

How has the popularity of robo-advisors grown since their debut in 2008?

Robo-advisors have seen a meteoric rise in popularity, managing $460 billion currently, which is a 30% increase compared to 2019. The industry is expected to expand further, with predictions of becoming a $1.2 trillion industry by 2024.

What is the current customer base and asset management figure for the company mentioned in the script?

The company has 600,000 customers across the U.S. and manages $29 billion in assets under management.

What is the skepticism about robo-advisors replacing human advisers in the future?

Critics believe that there will always be a need for conversational engagement alongside a robo-solution, implying that robots will not entirely replace human advisers.

How do robo-advisors automate their investments?

Robo-advisors use algorithms to tailor investment portfolios to individual investors with minimal to no human supervision, understanding their objectives, timeframes, and risk appetite to create diversified portfolios.

What is the primary quality that makes robo-advisors appealing to investors?

The primary quality making robo-advisors appealing is their convenience, allowing investors to sign up, take a survey on their preferences, and have the algorithm determine the best investment strategy.

How do robo-advisors differ from traditional financial advisors in terms of fees?

Robo-advisors typically charge less than 1% in fees, with many charging less than 0.5% depending on the account balance, compared to the industry average of 1% to 2% for traditional financial advisors.

Why are robo-advisors often recommended to younger investors?

Robo-advisors are recommended to younger investors due to their convenience, low fees, and suitability for those who may not know where to start with investments.

What is the potential future of robo-advisors in relation to human financial advisers?

The future likely involves a hybrid service that combines both human and digital advice, offering the ease of use from technology and the personal touch and subjectivity that investors seek.

Outlines

00:00

🤖 Rise of Robo-Advisors in American Finance

The script discusses the integration of automation in various aspects of American life, with a particular focus on the financial sector. It highlights the convenience and efficiency of robo-advisors, which use algorithms to create and manage investment portfolios with minimal human intervention. The rise of robo-advisors since 2008 has been significant, with the industry now managing $460 billion, a 30% increase from 2019. The script also touches on the skepticism surrounding robo-advisors and their potential to replace human financial advisers, suggesting that a hybrid model combining human and digital advice may be the future of financial services.

05:03

🚀 Growth and Challenges of the Robo-Advisory Industry

This paragraph delves into the growth of robo-advisors, especially among younger demographics like millennials and Gen Z, who are twice as likely to use these services compared to baby boomers. It also addresses the initial skepticism and the fear among traditional financial advisors that robo-advisors might replace them. Established brokerage firms have since entered the market, launching their own robo-advisory services. The paragraph emphasizes the importance of technological innovation and the agility of smaller companies in the face of competition from larger, more established firms. It also notes the human element in the design and oversight of robo-advisors and the potential for a hybrid model that combines digital convenience with personal financial advice.

10:08

🌐 Future Prospects of Robo-Advisors and Market Dynamics

The final paragraph contemplates the future growth of the robo-advisory space, suggesting that independent players like Betterment will continue to expand as younger generations become more accustomed to technology and inherit wealth. It also touches on the potential for robo-advisors to democratize investment opportunities and the importance of technological advancements in shaping the industry's trajectory. The paragraph concludes by acknowledging the increasing technological inclination of new investors and the role of time in favoring the development of the robo-advisory sector.

Keywords

💡Automation

Automation refers to the use of technology to control and monitor the manufacturing and industrial processes, reducing the need for human intervention. In the context of the video, it is integral to American life, exemplified by coffee makers and apps that simplify daily tasks. The script mentions automation's role in revolutionizing money management through robo-advisors, which is a key theme of the video.

💡Robo-advisors

Robo-advisors are digital platforms that use algorithms to manage and provide financial advice with minimal human supervision. They are central to the video's theme, illustrating the shift towards technology in financial services. The script discusses the rise of robo-advisors, their management of billions in assets, and their appeal due to convenience and lower fees.

💡Investing

Investing is the act of allocating resources, usually money, with the expectation of generating income or profit. The video script highlights how robo-advisors make investing more accessible and efficient, contrasting traditional methods with the automated, algorithm-driven approach of robo-advisors.

💡Algorithm

An algorithm is a set of rules or procedures for solving problems or accomplishing tasks, especially in mathematics and computer science. In the video, algorithms are crucial to how robo-advisors function, as they use them to create and adjust investment portfolios based on individual investor profiles.

💡Financial Adviser

A financial adviser is a professional who provides guidance on investment and financial planning. The script contrasts traditional financial advisers with robo-advisors, discussing the emergence of a hybrid model that combines digital convenience with human expertise.

💡Assets Under Management (AUM)

Assets Under Management refers to the total market value of investments that a financial institution manages on behalf of its clients. The video uses this term to quantify the growth and success of robo-advisors, such as Betterment managing $29 billion in AUM.

💡Convenience

Convenience in the video script is highlighted as a key advantage of robo-advisors, emphasizing the ease of use and the time-saving nature of digital financial platforms. It is a driving factor behind the adoption of robo-advisors as opposed to traditional financial services.

💡Index Funds

Index funds are a type of investment vehicle that aims to replicate the performance of a specific index, offering broad market exposure and diversification. The script mentions that most robo-advisors make passive investments using index funds or ETFs, which contributes to lower fees and diversified portfolios.

💡Fee Compression

Fee compression refers to the reduction in fees charged by service providers, often due to increased competition or technological advancements. In the context of the video, it is related to how robo-advisors charge lower fees than traditional financial advisors, making financial advice more accessible.

💡Millennials and Gen Z

Millennials and Gen Z are demographic cohorts, typically associated with being born between the early 1980s and the mid-1990s to the early 2000s. The video script notes the significant role these generations have played in the rise of robo-advisors due to their comfort with technology and preference for digital services.

💡Hybrid Services

Hybrid services in the video script refer to a combination of digital and human financial advice. This concept is introduced to address the limitations of robo-advisors, such as the lack of personal touch during market volatility, by offering a mix of technology and human interaction.

Highlights

Automation is deeply integrated into American life, with coffee makers, apps, and AI assistants becoming daily essentials.

Robo-advisors are revolutionizing money management by offering an alternative to traditional financial advisers.

Investors now have three options for investment management: self-management, financial advisers, or robo-advisors.

Robo-advisors have grown rapidly, managing $460 billion, a 30% increase from 2019, with predictions of a $1.2 trillion industry by 2024.

Betterment, one of the first robo-advisors, has expanded from 15,000 customers to 600,000, managing $29 billion in assets.

Critics argue that robo-advisors cannot fully replace human advisers, emphasizing the need for conversational engagement.

Robo-advisors use algorithms to create tailored investment portfolios with minimal human supervision.

The convenience of robo-advisors allows users to invest by simply signing up and answering a survey on investment preferences.

Robo-advisors offer a more usable experience, delivering financial plans in minutes compared to traditional methods.

Most robo-advisors make passive investments using index funds or ETFs, which are diversified and cost-effective.

Robo-advisors typically charge lower fees than human financial advisors, with the majority charging less than 0.5%.

Robo-advisors have democratized investment, making financial advice more affordable and accessible.

Younger investors are often recommended to use robo-advisors, but they also benefit older age groups.

The Great Recession of 2008 spurred the growth of financial technology, leading to the rise of Betterment and other robo-advisors.

Established brokerage firms have started launching their own robo-advisors to compete with startups.

Vanguard Personal Advisor, launched in 2015, is the largest direct consumer robo-advisor with over $215 billion in assets.

Smaller robo-advisors like Betterment have an advantage in innovation and agility compared to larger, more established firms.

Robo-advisors are designed and overseen by humans, blending technology with expertise in investment and technology.

Robo-advisors may not replace human financial advisers due to the lack of personal touch and emotional support during market volatility.

Hybrid services combining human and digital advice are being offered to address the emotional aspect of financial advice.

The future of the robo-advisory industry looks promising as technology improves and younger generations become wealthier.

Transcripts

Automation has become an essential part of American life.

Coffee makers brew your morning cup of Joe before you even wake up.

Apps can hail a cab within minutes and AI assistants are everywhere to help us throughout the day.

The trend has even begun to revolutionize money management with the rise of robo advisors.

It solves the problems that I had with respect to investing.

What I mean by that is, I would much prefer to trust somebody else, in this case, trust the technology, to make optimal investments for me as

opposed to me having to A: spend the time to do it myself and B: the acknowledgment that I'm unlikely to

perform better than an algorithm.

Investors, historically, they've had two options when it comes to managing their investments.

One, they could they could do it themselves.

Or two, you could work with the financial adviser.

With the advent of robo-advisors, there's a third option, and that's to merge the benefits of professional money management and advice with the

convenience of an all digital application.

Robo-advisors have had a meteoric rise in popularity since their debut in 2008.

Today, robo-advisors manage $460 billion, an increase of 30% compared to 2019, and the industry is expected to expand even further, with

some analysts predicting it will become a $1.2 trillion industry by 2024.

We have 600,000 customers across the U.S.

and we're managing $29 billion in assets under management.

However, critics remain skeptical that robo-advisors can entirely replace human advisers in the future.

I always think there's going to be an element of conversation engagement that's going to be necessary, alongside maybe a robo solution, but I think

that's going to be the future.

I don't think robots will replace humans.

So how do robo advisors automate their investments and what made their sudden rise to prominence possible?

Robo-advisors are financial advising platforms that use algorithms to tailor investment portfolios to individual investors with little to no

human supervision.

Most robo-advisors, they seek to, at a minimum, understand an investor's objectives, their timeframes, their risk appetite and

then in turn, they use that information to create diversified investment portfolios.

Robo-advisors will monitor your investments and they'll adjust them, as needed, to keep them in line with things like your target risk level and

your your goals as they evolve over time.

One of the primary qualities that make a robo-advisor so appealing is its convenience.

All you need to do is sign up, take a short survey on your investment preferences and life goals.

Then the robot plugs your answers into an algorithm to determine the best way to invest your money.

Once you make your first contribution.

The robo-advisor will begin to invest the money on your behalf.

Robo-advisors tend to offer just a much more useable experience from the time that you're signing up all the way through the whole journey.

And it's something I place great weight on, in terms of how I want to spend my time or I have software that I choose to interact with.

What used to perhaps take days, weeks, even months, we can now deliver a financial plan in minutes.

A majority of robo-advisors make passive investments that rely on index funds or ETFs.

This not only helps with the diversification of portfolios, but charges a lower fee.

A 1% fee is the industry average for traditional or human financial advisors, with some smaller accounts charging fees as high as 2%.

Meanwhile, five of the biggest robo-advisors in the market all charge fees less than 1%, with the majority charging less than .5%, depending on the

account balance.

Instead of having to have 600,000 meetings with clients, we write an algorithm and they all get the benefit of the advice directly through their

smartphone app. So the technology reduces the cost dramatically.

It allows it to be affordable for a lot of people for whom that advice would not have been affordable.

Fee compression, I think, has been something that's been growing over the last decade.

This is a very cost effective solution.

Then guess what? Robo advisors have really democratized the investment landscape, which I think has been beneficial.

Due to their convenience and low fees, robo-advisors are often recommended to younger investors, who simply don't know where to start.

But experts reassure that other age groups can benefit from it as well.

There's options for more sophisticated investors that want to kind of set it and forget it, you know, where there might be a portion of their

portfolio that they would like to be passive on.

But I do see, you know, an older population increasingly engaging with robo-advisors.

In fact, we actually did a study this past spring and we are seeing interest from the baby boomer population of upwards of 25%

of them considering a robo-advisor.

The Great Recession of 2008 led to an explosive growth in the financial technology sector, and startups like Betterment became one of the first

companies to introduce robo-advising to the public.

Today, Betterment has grown to become the largest independent robo-advisor in the market.

I joined in 2013, when the company was 20 people and had just about

15,000 customers spread all across the United States and was only managing a $100 million in assets.

And as of today, we are at about 300 employees.

We have 600,000 customers across the U.S.

and we're managing $29 billion in assets under management.

In the beginning, robo-advisors were met with great skepticism over their efficacy and profitability, a challenge that the industry still faces

today.

Also, I think to be honest with you, from an advisor perspective, I thought there was some fear.

Right? And looking at robo-solutions and potentially looking at them as maybe replacing human advisors down the road.

Robo-advisors sudden rise to prominence was made possible due to the massive interest and support from millennials and Gen Z.

According to a recent survey from Vanguard, millennials were twice as likely as young baby boomers to consider using a robo-advisor for

investments.

That means, yes, I believe that there are things, technology or algorithms that can do better than humans can, and I have no problem

trusting software to do that.

People came to realize that advice can benefit far more than just older, wealthier individuals.

Younger individuals can certainly benefit from advice.

They are craving advice.

They are facing very difficult situations and their in their personal lives that that command advice.

After the success of startups like Betterment and Wealthfront, more established brokerage firms including Merrill Lynch, Morgan Stanley, UBS

and Wells Fargo began launching their own robo-advisors.

In 2015, Vanguard, one of the world's largest asset management companies, launched Vanguard Personal Advisor.

It is the largest direct consumer robo-advisor in the market, with over $215 billion in assets under management.

We have been working in an all virtual model for decades now, and so unlike other traditional incumbents that might come to mind, you know, we don't

have retail brick and mortar locations that you can walk into.

Instead, across all of our channels, we serve close to 30 million investors and the overwhelming majority of those touch points actually

occur digitally.

Against well-established companies like Vanguard, smaller companies like Betterment believe their unique advantage is that they are a tech company

before they're a wealth management company.

The newer, younger robo-advisors tend to be more innovative, more focused on the technology and the services that they can offer because of that

technology then a lot of the existing incumbents who are more concerned about not losing money, not having money flow out, than they are about

gaining new customers.

Bigger is not always better.

Sometimes I like the smaller companies here.

They're a little bit more agile and also are early on in their growth story and trajectory.

So there are opportunities where they can continue to refine and modify their product to make it most suitable and also to attract

investors to their platforms.

On the other hand, established companies have what startups don't, institutional experience.

So they have established funds, sometimes there are core holdings, their investment solutions, the tools.

They also have a lot of capital behind their firm.

So they also can make changes.

You have to remember that the robo-advisors, they're not built by robots.

They're designed, created and overseen by humans.

And so in Vanguard's case, the talent we have, both on the investment and technology fronts, is top notch.

No matter who comes out on top, experts remind us that it's this kind of healthy competition that allows for growth within the industry.

Despite its immense popularity, the chances are slim that robo-advisors will replace traditional human financial advisers.

That's because one of the biggest disadvantages of broker-advisors is the lack of personal touch.

Clearly, there's always going to be a human element that's missing.

My problem always will be the emotional response.

So take a situation like last year when we're going through Covid-19 and markets are moving a lot.

The technology is not going to explain to you what's happening or try and walk through with you how to potentially deal with this situation.

According to one study, 40% of those surveyed said they were uncomfortable using robo-advisors during periods of extreme market volatility.

To combat this issue, many robo-advisor companies, including Betterment and Vanguard, began providing the option for hybrid services that combine

both human and digital advice.

Other investors we see crave validation from a financial adviser.

They have questions that aren't clearly addressed on a website.

They may be finding themselves in a really difficult situation where perhaps they don't even know the right questions to ask.

And so for those investors being able to pick up the phone and have a video conference with a financial adviser, have a discussion about their

needs and wants goes an incredibly long way to providing them the peace of mind that they so desperately need.

Some combination of the two probably is where we are headed for the future, some hybrid type of situation, where you can lean into

kind of the execution, the ease of use from a technological perspective, and also balancing that with a human adviser that can offer

you a little bit more engagement, the subjectivity, that I think a lot of investors are looking for.

Time is on the side of the robo-advisory industry as the technology continues to improve and the younger generations accrue more wealth.

New investors that are coming on board, they're far more technologically inclined than older generations.

So I think the robo space has room to grow.

The big independent players like Betterment are going to continue to grow as generationally, more people my age and younger are used to using that

technology and they inherit their parents money from the incumbents.