There’s currently a lot of fear from traditional advisors about the rapid growth of the robo-advisory industry led by Betterment and hybrid robo-advisor Personal Capital who deploy algorithms and human financial advisors to help clients manage money. Let’s look at the state of the robo advisor industry.
Robo-advisor assets under management (AUM) will balloon to over $3 trillion in 2021. Much of that growth will come from clients shifting their accounts to robo-advisors, away from traditional advisors, KPMG warned.
However, not all robo-advisors are created equal. Firms like Wealthfront have really quieted down in 2020, whereas Personal Capital and Betterment are still charging ahead.
Other firms like Vanguard are also doing well, given their massive legacy business.
Wealthy Robo-Advisor Client Breakdown
Only 13% of those investors who do work with a robo-advisor use the robo as their primary financial advisor. In contrast, 18% use a full-service brokers and 13% use a discount broker. Accountants and independent financial planners are each the primary financial advisors for 10% of wealthy, robo-advisor using investors who were surveyed. Additional types of human advisors have smaller shares of the primary advisor market.
Wealthy investors do not put all of their eggs into one basket. Among robo-using wealthy investors, 35% of their assets are controlled by the investor, not the robo-advisor. Those investors may use the robo for help with other tasks, such as forming a general financial plan. Or they may use the robo to obtain access to a trading platform.
Another 37% of those investors’ assets are invested through a robo-advisor. But 28% of their assets are invested with another financial advisor — basically, a human advisor.
In other words, no one advisor/broker captures 100% of a wealthy client’s assets. See the chart below from
The Hybrid Robo Advisor Is The Best Way To Go
Personal Capital, is the pioneer hybrid-robo advisor with over $13B in assets under management as of 2021. Since day one, they’ve been using the hybrid model to help provide financial advice at a lower price. The robo advisor industry is being dominated by Personal Capital and the traditional advisors that are evolving.
It’s clear their model is working because other robo-advisors like Betterment have also started offering human advisory services at a higher price.
The best thing about Personal Capital is that they have the most comprehensive, FREE, personal financial app to help anybody manage their finances by themselves. With the app, you can track your net worth, manage your cash flow, x-ray your portfolio for excessive fees, analyze your current investment asset allocation and calculate your future retirement cashflow.
Below is a snapshot of Personal Capital’s free retirement planner tool that estimates your realistic cashflow based on real inputs you’ve linked up in your account.
If you feel you could use professional financial management, Personal Capital can help. There are three main benefits of having human financial advice.
Benefits Of Using Personal Capital
1) Human touch. Investors tend to believe that human financial advisors are better at creating financial plans and making adjustments to cope with major life events. Even among robo-advisor users, 66% believe human advisors do a better job of creating a financial plan. Just 13% think a robo-advisor is better. Twenty-one percent think it’s a tossup. And 50% expect a human advisor to do a better job of adjusting investments to cope with life changes, while only 23% think a robo-advisor does that better.
If ever the market goes through a violent correct, having a human at the other end of the phone will help allay fears and help your from doing something drastic.
2) Coping with complexity. As clients age and their assets grow, their financial needs become more complex. Having a human advisors can help address estate planning issues, planning for a home, saving for college, more efficient investment strategies for tax purposes, and so forth.
3) Deeper Analysis. Robo-advisors have a reputation for providing objective guidance, uncluttered by emotion. But robo-advisors are only managing a percentage of a client’s overall assets. They can’t see everything. With a hybrid robo-advisor like Personal Capital, you can clarify that the money they are managing is X percentage of your net worth and you can specify different objectives.
Related: Personal Capital Pros And Cons
Robo-Advisors Are Here To Stay Long Term
Financial advice and asset management are based on the same fundamentals of Modern Portfolio Theory. Once you’ve identified your risk tolerance and desired goals, it’s all about making risk-appropriate investments that are monitored and rebalanced over time.
The traditional financial advisory community is clearly concerned about the robo-advisor movement taking marketshare away from their business that charges 1% – 3% of AUM. The robo advisor industry should continue to improve over time.
Nobody really wants to always be on the phone with their advisor. Instead, we’d rather have the best user interface possible and speak to an advisor perhaps once a quarter or so. It’s my belief that firms such as Personal Capital will continue to gain marketshare given their lower costs, free financial tools, and hybrid advisory model.
About the Author:
Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.