There is no denying the fact that today some of the most tedious and mundane tasks can be achieved through automation. Whether it is reliance on Roomba to clean your rugs or voice interaction with Alexa, robots have become a part of our day to day life, right from providing entertainment to investing money on our behalf. One such digital platform, known as robo advisor, also spelled as roboadvisor, typically provides automated investment advice and uses artificial information, or algorithms, to determine the financial situation and accordingly invest the client’s money, using nil or minimum human interference.
For both newcomers and retired professional investors, this once little-known financial gadget soon became a vital source of information on money management in most households. According to a survey by Statista, the market leader of reliable business data, it was estimated that the top Canadian robo advisor firms held assets worth US $8.1 billion in 2020, which is predicted to increase to US $16.6 billion by the end of 2023.
Robo-advisory industry and Covid-19
With the coronavirus befuddling even the most advanced countries of the world in 2020, the still fledging robo advisory market began facing new challenges. While there was a significant increase in customer base in the two years preceding it, there was hardly any penetration achieved in this field in 2020. What was expected to grow rapidly, got hampered by either due to a low level of financial literacy by the public or general mistrust in the financial institutions or both compounded by the pandemic.
Do it yourself trading became very popular all over the world after the onset of Covid-19 as people felt that it was a good way to make up for the income loss due to the pandemic. Additionally, with more time on hand people began trying out things which they would never have thought of in normal times. No doubt, in those tumultuous times there were winners and losers, but things began to backfire as investors started spending too much time attempting to predict a future which is till today very unpredictable.
While the coronavirus sent the globe in a frenzy and impacted the whole human race negatively, the robo-advisory industry proved its worth with a massive surge in signups like never before. In the first four months of 2020, account numbers soared 3.1% across all providers, which was an all time high.
Individually, platforms such as Vanguard, reported a growth of 14% in assets and an impressive 35% in the number of customers. As the equity market went down on its knees, the DIY investors relied more and more on the advice of the automated robot advisors, rather than their own knowledge and experience which had already been shaken by the pandemic. Additionally, robo advisors offered a slew of advantages over the traditional modes of investment, such as:
- Unfazed by emotions.
- Investment in stable companies.
- Long-term investment duration
- Constant re-evaluation
- Low fees.
Are Robots the future or fad?
Critics continue to be skeptical whether technology and algorithms can replace human advisors totally, irrespective of their stellar reputation as a low-cost and efficient finance management tool. While robo advisory has been touted by some as a game-changer in the world of investment, others consider it will run out of steam as soon as they hit a plateau they cannot climb.
The detractors will have valid arguments as to how a machine could get a grasp of the nuances of successful investing, without the help of a human advisor who can better understand the clients through personal contact. After all, a robo has no office where a client could just walk in and interact with a financial advisor. So the question is how will the robo advisors be able to sustain themselves if people are not willing for machines to take care of their money?
There is no doubt that at the onset of the coronavirus pandemic, the whole robo market experienced a big dip as investor’s were unwilling to put money in unstable assets, but by the end of 2020 robo advisors aptly demonstrated positive records in performance as many new retail investors gave it a go to digital wealth management.
To further combat the missing element of human interaction, especially through Covid-19, when markets were fluctuating dramatically, many top robo advisor companies, such as Vanguard and Betterment, introduced a form of hybrid service which offered the customer the option to add human advice along with the digital advice. For those investors who craved for support from a real life advisor this was a novel way of providing peace of mind they desperately wanted.
Time is in favor of the robo advisory sector because with the advancement of technology, more and more from the younger generation will be able to amass wealth. According to a survey conducted by Global X, a fund management agency, one in five millennials are happy to invest their funds with a robo advisor.
With the introduction of hybrid services, firstly there is plenty of room for robo space to grow. In the coming future, this is likely to be modified and become even more sophisticated. Secondly, research further indicates that as millennials will form a major part of the investing population, many robo advising platforms will latch on to this trend and exclusively market themselves to the millennial investors.
One last word
Since their launch more than a decade back, the global robo advisor industry has managed assets worth around $460 billion in 2020 alone and are further expected to touch the $1.2 trillion mark by 2024. Initially investors had two ways of managing their wealth, either through a broker or a finance specialist.
With the merging of professional wealth management with an all-digital application, a third option in the form of robo advisors quickly rose to prominence. So even though some believe that algorithms can do a better job than humans, critics do not agree that robo advisors can be a viable substitute to human advisors totally in the years to come.
