Election years can be particularly volatile for the stock market. If the past few months are an indicator, the next few months are likely to continue to be volatile especially in light of the Democrats' new impeachment charge. It probably will be difficult for any investment expert to advise clients regarding the appropriate investment decisions in the next 12 months, but will it be even more difficult for robo-advisors to successfully retain and attract investors during the anticipated volatility of the next 12 months?
Today, only a relatively small percentage of investors use a robo-advisor for some or all of their assets, according to Spectrem Group’s ongoing research with investors. Those who use a robo-advisor tend to be young, wealthy investors who consider themselves to be knowledgeable about investing and who tend to be aggressive in their risk tolerance. Additionally, however, there are a number of investors who use the robo-advisor as a supplement to their traditional advisor.
But even when using a robo-advisor, many investors tend to rely upon relatively safe approaches. In research conducted by Spectrem Group with robo-advisor users, we found that 56% of investors using a robo-advisor were using the services of a large brand-name provider such as Schwab, Fidelity or Vanguard. The reasons for choosing a robo-advisor ranged from fees (38%) to unbiased approach (35%) to the belief that robo-advisors provided a better approach based upon that investor's unique risk tolerance and life stage (27%). Only 28% chose a robo-advisor based upon the robo-advisor’s investment track record. Eighteen percent of robo-advisor users felt that the availability of human-assisted advice if needed was important.
It’s interesting to note that 51% of robo-advisor users feel that their robo-advisor should beat the market and 27% of investors have actually changed robo-advisors. While most investors expect their human advisor to beat the market, human advisor-client relationships tend to be very long-term, usually exceeding 10-plus years.
We asked robo-advisor users if they had been contacted by their robo-advisor after a particularly volatile quarter, and 56% indicated that they had been contacted and given portfolio recommendations.
So, as we approach an anticipated timeframe in which the market could be relatively volatile, how will the robo-advisors do? As far as investment return, it is anticipated they will do the same or potentially better than some human advisors, but will that meet the needs of the investors using robo-advisors?
Spectrem’s research indicates that advisor satisfaction increases when advisors proactively reach out to investors, especially during times of volatility. That proactive outreach can be as simple as an email or can be a phone call or full-fledged meeting. Even younger investors still enjoy a face-to-face meeting. This could become a potential downfall for robo-advisors during a volatile time.
While many investors may be comfortable not discussing volatile markets with their advisor, the higher rate of turnover seen with robo-advisors indicates that the next 12 months may be a rocky time. While automated push-outs may help calm nervous investors, some individuals will simply want to talk to someone. Even if the human advisor would recommend that the investor should “stay the course”, the ability to fully engage in a conversation and to understand why it is important to an investor will be lacking in the robo-advisor relationship.
While the elimination of all robo-advisors is not near, the next 12 months will provide human advisors the ability to promote their own value-added human touch.