Who Is Using Financial Robo-Advisors?

LIMRA Survey Results Provide Some Insight

Who Is Using Financial Robo-Advisors?
February 19, 2016

Some investors who are tired of paying high fees for their financial and investment services are switching to robo-advisors — 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 advisor when the returns do not justify the costs? It is a compelling argument.

A new study by LIMRA looked into the use of robo-advisors 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-advisors.

It should come as no surprise that familiarity and comfort levels with robo-advisors decrease with increasing age. Only 2% of Baby Boomers were familiar with robo-advisors 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-advisors, there seem to be an adoption rate near 50% that crosses all generations. About half of the people who are familiar with robo-advisors 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-advisors' performance.

Rather than considering robo-advisors as competition, LIMRA suggests that advisors 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 advisors who can provide tools for clients to use while providing auxiliary advice for more complex matters will be very appealing to sophisticated investors.

Previous research by LIMRA found that Generation Y consumers want to learn about topics beyond the capabilities of robo-advisors. 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-advisors look attractive is that in a bull market like the US enjoyed in recent times, it is easy for the passive approach of robo-advisors 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 advisor 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. Advisors 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 advisor who dismisses automated platforms or are not comfortable with technology, the LIMRA report should be a strong hint for you to adapt.


Photo ©iStock.com/DirkFreder

  Conversation   |   12 Comments

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Nancy | 02.19.16 @ 18:01
As with any new technology there are people who are comfortable using it and those that drag themselves into the future only by force.
Carla Truett | 02.19.16 @ 18:02
This would be a great alternative as long as the developer of the robo-advisor could be trusted.
Steffanie | 02.19.16 @ 18:04
I just can't like the idea of a robo adviser. There is something to be said about human contact and talking one on one with someone.
Erin | 02.19.16 @ 18:04
I can see how this would be helpful. Maybe in conjunction with a human adviser. At least the algorithm would take out the emotional element to investing.
trish | 02.19.16 @ 18:04
I think that this comes as no surprise that technology is finding its way into this realm. It's a matter of finding out how well it works for you and your comfort level with using and depending upon it. I'm a wait until it has been proven effective kinda gal
Elaine | 02.19.16 @ 18:05
If you can trust the people, I guess it would be a great idea. I'm sure some will still be early of new technology.
Sarah | 02.19.16 @ 18:06
well I could see this working better for me, honestly. I have a general dislike of people so using a computerized system seems awesome. yeah...
Amanda | 02.19.16 @ 18:09
see the benefits of using it, and will look more into it to see IF it's something we should do
Irene | 02.19.16 @ 18:11
I never heard if this before, sounds a little scary to trust your money to something automated
Bobbie | 02.19.16 @ 18:12
That is a little on the scary side. Who programs these things? What is the security in place on them? And really no one can predict the market other than those in charge of the laws that govern them.
Daniel Dohlstrom | 02.19.16 @ 18:12
Seems these types of advisers certainly have a place but as with anything be sure you keep an eye on your investments and know exactly what is being done
Meredith L | 02.19.16 @ 18:13
While I know firsthand the benefit of integrating robo-technology and authentic human interaction, going full on tech is a little scary and...distant. It's good to be proactive in our research, but really, there must be a human aspect, right? Knowing the numbers is great but sometimes there has to be a "gut instinct" too.
$commenter.renderDisplayableName() | 12.05.16 @ 00:44
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