Finance

Why robo-advisors are striving toward a 'hybrid model,' as the industry passes the $460 billion mark

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Robo-advising to become a $1.2 trillion industry by 2024, analysts predict
Key Points
  • Robo-advisors manage $460 billion, and the robo-advisory industry is expected to grow to $1.2 trillion by 2024.
  • Interest and support from millennials and Gen Z helped robo-advisors rise to prominence.
  • Critics have remained skeptical about whether robo-advisors can entirely replace human advisors.
  • Many robo-advisors are providing hybrid services that combine human and digital advice.

Since launching more than a decade ago, robo-advisors – online investment services that offer financial advice driven by algorithms – have grown into an industry that managed $460 billion in 2020.

That's a 30% increase from 2019.

Some analysts predict robo-advising will become a $1.2 trillion industry by 2024.

"Investors historically have had two options when it comes to managing their investments. They could do it themselves through something like an online broker or you can work with a financial advisor," said Brian Concannon, head of digital advisor at Vanguard.

"Now, with the advent of robo-advisors, there's a third option, and that's to merge the benefits of professional money management and advice with the convenience of an all-digital application," he said.

Robo-advisors' sudden rise to prominence was made possible due to massive interest and support from millennials and Gen Z. According to a recent survey by Vanguard, millennials were twice as likely as young baby boomers to consider using a robo-advisor for investments.

"I believe that there are things that technology or algorithms can do better than humans can," said Taylor Crane, a robo-advisor customer. "And I have no problem trusting a software to do that."

Skeptics do not expect robo-advisors to replace human advisors entirely in the near future.

"Clearly, there's always going to be a human element that's missing," said Jason Snipe, chief investment officer at Odyssey Capital Advisors. "My problem always will be the emotional response. Take a situation like last year when we're going through Covid-19 and markets are moving a lot, dramatically. ... You can't talk to the technology, right?"

To combat this, many robo-advisor companies including Betterment and Vanguard began providing the option of hybrid services that combine human and digital advice.

"[Some] investors we see crave validation from a financial advisor," said Concannon. "So for those investors, being able to pick up the phone and have a video conference with a financial advisor, have a discussion about their needs and wants, goes an incredibly long way to providing them the peace of mind that they so desperately need."

Time is on the side of the robo-advisory industry as the technology continues to improve and the younger generations accrue more wealth.

"I think some combination of the two probably is where we are headed for in the future," said Snipe. "I think the robo space has room to grow. I think it will obviously modify and change and become even more sophisticated."