Some investors who are tired of paying high fees for their financial and investment services are switching to robo-advisers — automated investment programs and algorithms that take input from investors and automatically manage investments based on that input. Given that actively managed funds do not often outperform the market, why pay extra for an adviser when the returns do not justify the costs? It is a compelling argument.
A new study by LIMRA looked into the use of robo-advisers and found that there is plenty of room for growth in the industry. Around 81% of consumers are not even familiar with the concept of robo-advisers.
It should come as no surprise that familiarity and comfort levels with robo-advisers decrease with increasing age. Only 2% of Baby Boomers were familiar with robo-advisers and only 1% currently uses them. The numbers change to 13% and 7% respectively with Generation X and 20% and 11% respectively with Generation Y.
Notice that while younger and more technologically savvy generations engage with robo-advisers, there seem to be an adoption rate near 50% that crosses all generations. About half of the people who are familiar with robo-advisers decide to use them.
Automated platforms also tend to appeal to those with greater wealth ($500,000 or above in investable assets) who prefer the independence of their own investment decisions. It is increasingly popular for wealthier investors to take small amounts of their investment money to test robo-advisers’ performance.
Rather than considering robo-advisers as competition, LIMRA suggests that advisers embrace the technology and incorporate automated platforms into their offerings. Most robo-advising platforms cannot handle all of the sophisticated investment needs of the very wealthy, and advisers who can provide tools for clients to use while providing auxiliary advice for more complex matters will be very appealing to sophisticated investors.
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Previous research by LIMRA found that Generation Y consumers want to learn about topics beyond the capabilities of robo-advisers. Around half prefer professional advice on life insurance and 80% are interested in learning about saving strategies and options that make the most sense for their lifestyle and needs. Younger consumers are also more willing to work with a financial professional whom their parents recommend, therefore incorporating automated technologies into your offerings will appeal to younger family members and help you retain clients within the same family.
Part of the reason that robo-advisers look attractive is that in a bull market like the US enjoyed in recent times, it is easy for the passive approach of robo-advisers to make money. Active management requires riskier moves to beat the overall market, which can backfire on even the most insightful fund manager. Less experienced managers can fall far before market performance.
However, the passive approach tends to give poorer results in a sinking market. The true advantage of an active fund manager is to steer you through difficult times and limit your losses relative to the market. The best approach is to find an adviser who can blend the methods and use robo-advising tools to keep costs down in good times while stepping in to intervene during down markets and in cases with more complex financial needs.
That is the essence of LIMRA’s findings. Advisers who can successfully blend these approaches and appeal to younger consumers should do well, while others may struggle to make inroads with the new generation of investors. If you are a financial adviser who dismisses automated platforms or are not comfortable with technology, the LIMRA report should be a strong hint for you to adapt.