The use of automated advice platform, or so-called robo advisors, is continuing to rise, with about 8% of U.S. households having money invested with a robo, according to research from data and analytics firm Hearts & Wallets that is included in a new report from Backend Benchmarking.
“While the number is not groundbreaking, it is impressive for a service that barely existed 10 years ago,” the report read. “Providers see robo advice as a new way to engage with clients early on and then ramp up to full-service offerings as their wealth grows. One way they have been doing this is offering free digital financial planning tools to complement their existing low-cost robo advisor.”
The report also found that the turmoil of the COVID-19 pandemic had not stilled funding into digital advice, with firms like Wealthsimple raising $114 million and M1 Finance raising $45 million, according to the report. Like most industries, robo advisors faced a difficult start to the year, but portfolios were seeing a rebound in the third quarter; while portfolios were down on average 2.93% in the first six months of 2020, the average total portfolio returns up 1.88% year to date (as of 9/30/2020).
While digital advice and robo advisory options are often seen as being primarily for those new to investing and often with little in the way of assets, robo advisors are popular with millennials that have significant investable assets; nearly half of millennials with more than $500,000 to invest use a robo, according to Hearts & Wallets' survey of more than 5,000 participants. But for mass affluent millennial households with between $50,000 and $500,000 in investable assets, only 20% reported they used a robo, along with 15% of Generation X families and 5% of baby boomer families in the same sphere.
“Although robos have not taken significant market share from traditional advice today, the battleground for clients is shifting to much younger clients at early stages of wealth accumulation,” the report read. “As the millennial generation matures, traditional advisors may increasingly find that prospective clients have settled already into a financial advice relationship.”
The report noted that a number of institutions, including Fidelity, Schwab and Bank of America, had all released a spate of new free applications or features. By offering such options at no price, Backend Benchmarking believed the firms were succeeding at creating a “natural funnel from a free service to their trading or managed account platforms.”
Additionally, the report indicated that four out of six SRI (socially responsible investing) portfolios Backend tracked at a number of providers actually outperformed standard counterparts on an absolute basis, with all six outperforming standard counterparts when it came to equity performance (Backend followed the portfolios at Betterment, E*Trade, Ellevest, Merrill Edge, Morgan Stanley, TD Ameritrade, TIAA and Wealthsimple).
Even the two times when the standard portfolio outperformed the SRI option (at Ellevest and TD Ameritrade), Backend found it was not by much, compared to other examples where the SRI option performance significantly distanced itself from the standard portfolio performance.