Can robots help Americans be better prepared for retirement?
Online investment services that provide automated, algorithm-based portfolio management advice have attracted millions of investors over the past few years with their low fees and minimum requirements.
The so-called robo-advisors had an estimated $8 billion in assets under management as of July, a 34 percent increase from last year, according to financial research firm CB Insights. By 2020, assets in these services could grow to nearly $2.2 trillion, management consulting firm A.T. Kearney estimates. (That's still a relatively small piece of the overall investment asset pie — Vanguard alone has about $3 trillion in global assets under management — but it's not insignificant.)
Established financial services companies have taken notice. In August, BlackRock, the world's largest asset manager, acquired FutureAdvisor, a robo-advisor with more than $600 million in assets under management, in a deal valued at between $150 million and $200 million. Venture-backed robo-advisors, such as Betterment, Personal Capital and Wealthfront, are competing with new automated investment advice services launched earlier this year by Charles Schwab and Vanguard.
Robo-advisors aren't just for tech-savvy millennials. Personal Capital, which offers a hybrid model combining online services with financial advisors, targets high net worth individuals and FutureAdvisor's average client is a Gen Xer, according to market researcher Aite Group.
"The entrenched view that these digital advisors are only for millennials is no longer accurate," concluded Sophie Louvel Schmitt, a senior analyst at Aite in her March 2015 report on the industry.
A big part of the appeal of robo-advisors is that they charge less than the traditional 1 percent fee many financial advisors charge. For example, robo-advisor WiseBanyan, which has $35 million in assets under management, offers basic portfolio allocation advice for free based on to a brief survey of risk tolerance, but charges for customized advice. SigFig, another online investment company, charges an annual fee of 0.25 percent for its managed accounts. Personal Capital, which manages more than $1.5 billion in assets, has fees that range depending on the size of the account, sliding from 0.89 percent of assets down to 0.49 percent.
The willingness to take clients with low account balances is another draw. Wealthfront has a $500 account minimum and Betterment has no account minimum at all.
Several robo-advisors plan to offer their services through employer-sponsored retirement plans, such as 401(k)s. Last month, Betterment announced the launch of a 401(k) product, saying it will offer both investment management and plan administration services. Start-up Blooom and Financial Engines, the nation's largest independent registered investment advisor, provide automated services that manage asset allocation in retirement accounts for a fee.
Retirement experts hope that robo-advisors can also help more small employers offer retirement plans at a lower cost. An estimated 78 million Americans, or half of American workers, don't have access to an employer-sponsored retirement plan.
Size can be a costly issue for participants in small retirement plans. FeeX, a service that calculates the fees in retirement plans, found that retirement plans with fewer than 100 participants have average fund expenses that are three times higher than those at plans with more than 100,000 participants.
Yet robo-advisors, many of which have sprung up in the last few years, have never experienced a bear market.
"How are they going to fare in different market conditions?" asked Chad Parks, founder and CEO of Ubiquity Retirement + Savings, which provides retirement plans to small businesses. Parks said Ubiquity is in talks with several robo-advisors to provide them with help on handling the administration of retirement plans for small businesses.
Investors will still need human advisors to coach them during periods of market volatility, said Wesley Gray, CEO of Alpha Architect, a quantitative investment firm. "The robos make good advisors better and will cause the bad ones to be fired," he said.
Whether robo-advisors can close the retirement savings gap remains to be seen. However, they will continue to put pressure on retirement plan providers and financial advisors to lower their fees, said William Boland, a senior analyst at Aite, and robo-advisors could offer more tools to produce personalized advice that improves how workers engage with their retirement plans.
In the future, Boland sees the lines been traditional advisors and robo-advisors blurring. "Robo-advisors can help clients with the on-boarding process of joining a retirement plan, manage their investments and rebalance their portfolios," he said. "That frees up human advisors to provide more holistic financial advice to their clients."