It all started with Betterment in 2008. Taking advantage of a climate of distrust towards financial professionals, 30-year-old Jon Stein launched the first and still most popular robo-advisor for consumers. Rather than entrusting their money to a financial advisor, Betterment gave everyday people investment portfolios managed by an algorithm.
Was it the beginning of the dreaded "Rise of the Machines" or a disruption that would change financial services forever? You be the judge. Today, you can easily find a personal finance app that operates with sophisticated automation, and you're not the only one who's using it. Many human financial advisors now use robos as part of their client offering.
The Ongoing Battle for Retail Investors
Fully understanding the rise of robo-advisors requires a brief history of the financial services industry. In 2006, Ameritrade bought TD Waterhouse and formed a new entity called TD Ameritrade. With a history of technology innovations and a retail platform established in 1998, they quickly rose to dominance in the self-directed investor space.
Offering online trading without a broker was a step in the right direction, but it wasn't enough. Investors still needed to pay trading fees and watch for market volatility. Betterment changed that with auto-managed portfolios. The financial crisis opened the door for them to scale quickly because trust in the system was at an all-time low.
Fast forward to 2022. TD Ameritrade is now owned by Charles Schwab. The combined firm has $6.9 trillion in assets from over 30 million retail clients. They offer self-directed investing, their own robo-advisor (Intelligent Portfolios), and hybrid models where investors can access a financial professional for advice. Betterment has 700,000 clients and $32 billion in assets.
Algorithmic Trading Has Taken Over Wall Street
The question of "robo-advisors" versus "human advisors" is somewhat moot in modern stock market trading. Conservative estimates put the percentage of algorithmic trading on Wall Street somewhere between 60% and 73%. Some sources claim it's as high as 92%. In other words, the computers are already doing the buying and selling for us.
Pure robo-advisors like Betterment, Personal Capital, and Wealthfront, offer their users a hands-off experience where they can simply deposit money and let the machines do the rest for them. All three of these now have hybrid options available for investors who like to have a human flying the plane. That's where the industry is headed.
The Rise of Acorns and Robinhood
Earlier this year, Acorns Wealth, which is a personal finance app that offers automated managed portfolios, announced that they would be launching self-directed trading later this year. They're competing with Robinhood, which has become wildly popular with new investors in recent years. That trend is going away from both human and robo-advisors.
Does this mean robos are on their way out? It's unlikely. Self-directed investing was easy during the bull market of the past few years. As interest rates rise and the market corrects itself, the do-it-yourselfers are admitting they need help. Heavy losses will bring them back around to asking human financial advisors for assistance. Those humans use robos.
The Bottom Line: Robo-Advisors Will Not Replace Humans
Robo-advisors are tools, just like any other technology. In the beginning, they were marketed directly to retail investors and viewed as competition to human financial advisors. That's no longer the case. Modern advisory firms integrate robo-advisor applications into their practice. This new "hybrid" model for financial advice is where the industry is headed.
On the other side of that coin, robo-advisors like Betterment and Personal Capital, now have hybrid services available where their customers can get assistance from a human financial planner. This model is like what advisory firms are doing, bringing the two sides closer together, not further apart. Ultimately, this works out better for investors.
Reference: CNBC
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Original Source: Credello: Everything to Know About Robo-Advisors (And Could They Replace Human Financial Advisors?)
