In 2008, a new financial advisory service was launched in response to the global financial crisis. Many investors were unhappy with their performance results following the greatest financial dislocation since the Great Depression. In an effort to offer a solution to these disgruntled investors, the robo-advisor industry was born. Although most financial historians use 2008 as the official starting date for the robo-advisor industry, the first robo-advisor platform was actually rolled out in 2006, by Mint, a web-based personal financial management service. By 2008, several traditional financial services firms were trying to replicate the success of Mint by developing their own personal financial management software.

 

What exactly is a robo-advisor and how does it differ from a traditional financial advisor? A robo-advisor is a class of financial advisor that provides financial advice through an online platform using minimal human intervention. The advice is based on mathematical rules (i.e. algorithms) provided in a digital format. Human intervention is not required because the financial advice is centered around algorithms which are executed by software. The software automatically allocates, manages and optimizes client assets.

 

During the first few years of its existence, the robo-advisor industry was incredibly popular. Assets under management (AUM) exploded to the upside as several research groups and industry professionals predicted that robo-advisors would exceed the AUM of traditional financial advisors in less than ten years. This bold forecast turned out to be completely wrong. The robo-advisor momentum began to fade about five years after its launch date in 2008. Today, robo-advisors control only a tiny slice of assets under management within the investment advisor industry. Let’s review the numbers.

 

Without question, the robo-advisor industry has generated impressive results since its launch in 2008. However, the results have fallen well short of expectations. Based on data provided by RoboAdvisors.com, global AUM was $19 billion in 2014. Over the course of the next three years, AUM climbed to $225 billion. This represented a dramatic increase of 1,084%. In response to these remarkable numbers, several research groups and industry leaders projected that global AUM would be $2.2 trillion by 2020 and $4.1 trillion by 2022. These bold forecasts turned out to be entirely too optimistic. In mid-2019, the Aite Group reported that robo-advisor AUM was $350 billion, well short of expectations. For the sake of comparison, traditional financial advisors manage $83.7 trillion. This figure is based on data provided by Financial Advisor Magazine.

 

What happened to the robo-advisor industry? Why did robo-advisors lose their momentum? Why was the industry unable to meet its lofty expectations? The robo-advisor industry selected a perfect time to launch its service. The financial markets were on the verge of complete turmoil when robo-advisors appeared on the scene in 2008. After losing a considerable sum of money following the global financial crisis, investors were searching for a fresh approach to managing their retirement accounts. The robo-advisor industry did a fantastic job marketing their services to tech-savvy baby boomers. This explains why the industry enjoyed tremendous growth during the first 5 to 7 years of its existence.

 

In the years following the global financial crisis, millions of baby boomers began to retire. Many of the baby boomers who switched to a robo-advisor format during the financial crisis, began to realize that they needed help formulating a solid retirement plan. This included such things as tax strategies, estate planning, social security and long-term care solutions. Robo-advisors were simply unable to provide the necessary assistance in these specific areas. Consequently, a large percentage of baby boomers transferred their assets back to a traditional financial advisor who could answer questions pertaining to these rather complicated financial topics.

 

In reality, a robo-advisor is nothing more than an asset allocator. Robo-advisors will never be able to provide solutions to complicated topics such as taxes, social security and estate planning. Only a licensed investment professional can plan a proper retirement strategy for most people. Robo-advisors will always be severely restricted in this area. Therefore, it’s highly unlikely that the robo-advisor industry will ever match the AUM levels of traditional financial advisors.

 

 

Angelica Roxas has been licensed as an investment professional for 20 years. She is a Financial Strategist and President of Strategic Asset Preservation, Inc. Angelica is an expert in helping pre-retirees and retirees develop a recession-proof retirement plan.