Robo-Advisors: Portfolios on Autopilot

Robo-advisors are hotly discussed in the financial news these days. Services such as Betterment, among others, offer a fun, accessible investment interface with no minimum investment, and lower fees than many financial advisors charge. But are robo-advisor services a good idea? Are they serious players? Let’s take a look at this new trend and discuss how it’s evolving, as well as the initial wrinkles that have come up.

1. Robo-advising is in its infancy.
Robo-advising is still a relatively small industry, accounting in 2015 for only $20 billion of the total $24 trillion in American retirement assets. As such, despite all the hype, robo-advising has yet to become a significant force. While a few robo-investment services are backed by large financial firms such as Schwab, by and large it involves a lot of small fish—more than 200, according to CNBC. One risk of taking up with a small player over the next few years is that there will likely be buy-outs, mergers, and also casualties as a few leading services become heavier hitters and outstrip the others.

2. Robo-investing is a great hook, but is it really all that innovative?
This new concept is basically still one in a crowded field of investments, and it’s unclear as yet how they truly innovate beyond the ideas of having your portfolio administered more efficiently and less costly by a robot. In fact, you’ll want to do some digging if you consider a robo-advisor, because it’s not always clear at first glance, but some of these platforms involve managed funds, while others are passive. If you take one service as emblematic of the industry as a whole, you might not actually know what you’re getting into.

3. Who’s behind the curtain?
The instant gratification of tapping an app, purportedly simplifying the complex layers of finance, is understandably alluring, but can you reach an actual human when you have concerns? As you already know if you use online retail outlets, companies invest in online automation in part because it reduces their staffing needs. That’s great for their bottom line, but when it comes to your hard-earned savings and investments, you need to be certain someone’s going to pick up the phone. Otherwise, robo-investing bodes to be particularly stressful when the market is in flux. And don’t mistake, at some point, the markets will be in flux again.

4. Robots aren’t great at nuance.
Often, our financial goals involve a variety of factors, and require a multi-prong approach. Traditional advisors offer retirement planning, tax preparation, and a variety of other services, while robo-advising is limited in scope to security selection and possibly overall portfolio management. Flesh-and-blood advisors also keep up with your life circumstances and adjust your investment strategy accordingly. If you’re using a robo service as a portion of your total investment plan, that might not be a problem. But if your life, and thus your investment needs, have a lot of moving parts, a robo-advisor alone is likely not going to be enough.

For the moment, robo-advising still looks like a fun side-enterprise. If you’ve got some mad money lying around and want to test this new technology, sharing results with friends over evening drinks, it could be highly entertaining. But as baskets go, robo-advising is not the one to put all your eggs in—not yet.