After the pandemic flipped the world of interaction on its head, most investors got used to some level of digitisation in their relationship with their advisor. But now, more and more investors deciding to cut out the human and embrace the digital entirely.
According to Polaris Market Research, the robo-advisory market is predicted to grow from $7.4 billion in 2023 to a whopping $72.0 billion by 2032. Deloitte predict similarly impressive growth, estimating that $16.0 trillion in assets under management will be managed with the support of robo-advisory services by the year 2025 up from between $2.2 to $3.7 trillion in 2020.
Robo-advisors tend to handle investment management, offering services such as automated portfolio allocation and rebalancing. They use algorithms and inputs from an investor, such as risk tolerance or goals, to offer advice or invest. Their typically low fees and minimal account requirements often appeal to those just starting in their investment journey, but they can also appeal to investors who want a modern, more hands-off approach.
Generational divides
According to Investopedia’s Affluent Millennial Investing Survey, 20% of affluent millennials use robo-advisors, compared to only 9% of investors aged 47 to 54. Their use is most prevalent among 18- to 22-year-olds, however, with 31% of this age group reporting the use of robo-advisors.
Theresa Carey, brokerage expert at Investopedia, explained that robo-advisors are catching on with younger investors because of their relationship to technology.
“This is a generation that grew up with mobile phones in hand, so making those services app-based created a natural draw,” Carey noted.
Despite this, Investopedia found the majority of the affluent millennials it surveyed still reported a preference for human financial advisors.
Perceived value-add
A study conducted by Vanguard looking into human and robo-advice also found a preference for the human. It surveyed more than 1,500 US investors who reported having a human adviser, a digital adviser, or both and discovered that investors had a better perception of human advisory in terms of value-add.
Vanguard found that those working with a human adviser estimated their annual average return was 15%. These same investors believed they would have only seen a 10% return if they had been unadvised. Meanwhile, those with digital-only advice reported perceived average portfolio returns of 24%. Without their digital advice, they expected an annual return of 21%.
Though in terms of absolute performance, this suggests that robo-advised investors believe they achieve higher returns than human-advised investors, Vanguard noted that digital-advised investors tended to self-report being more aggressive in their investments, which could account for this expected outperformance.
In addition, Vanguard’s survey found that robo-advised investors believe they can achieve a large portion of their performance on their own, further suggesting the better perceived value of a human advisor.
The survey found that those with a human advisor, on average, achieved 59% of their financial goals and believed they would have only achieved 43% of their goals had they not had their advisor. Robo-advised investors, meanwhile, achieved 50% of their financial goals and believed they could have achieved 45% on their own.
The median financial goal for both sets of clients was $1 million.
Combining human and robo-advice
Vanguard found that clients preferred human delivery for many advice services. The survey found that this preference was particularly strong around the emotional and financial success components of advice, rather than the portfolio dimension. Services that investors preferred to digital delivery related to functional tasks and portfolio management, such as diversifying investments and management of taxation.
For Vanguard, this suggests advisors should leverage technology to scale their business and focus on strengthening their uniquely human value proposition.
A recent study by SEI looking into the state of productivity within the UK wealth management sector found that wealth managers spend, on average, spend just 43% of their time on value-add tasks such as time in front of clients, investing, or business development.
“Outsourcing can help reduce costs, manual process errors, complexities, and time spent recruiting and training. When done well, outsourcing can significantly impact productivity over time – creating room for growth,” said Jim London, head of SEI’s UK Private Banking and Wealth Management business.