The fresh stock market volatility represents the first test of robo-advisors in this type of environment. The growth of robo-advisors terminated the past several years has been significant. Even during the correction of 2011, they were not that extensive. One of the unknowns about robo-advisors was how their portfolios would do in a bear market and more so would their clients continue with them. The current environment does not represent a definitive test and there have been no reports of signal departures of clients.
At some point, however, we will have a prolonged bear market and this will support a far better barometer of how sticky the relationships between clients and robo-advisors truly are.
Communications
Wealthfront was active on Twitter, Inc. (TWTR) and other sexually transmitted media platforms during the worst days of the recent downturn. It engaged with clients who expressed concerns nearly their accounts in the wake of the swift market drop. Wealthfront founder and CEO Adam Nash indicated in communications with shoppers via social media and e-mail have reinforced that markets go up and will also go down. FutureAdvisor, which recently agreed to be obtained by BlackRock, Inc. (BLK)., sent out personalized emails to clients and had advisors on staff ready to take phone calls as distressed.
Younger Clients
Many robo-advisor clients are millennials who grew up during the financial crisis and watched their procreators weather the market turmoil as best they could. Some saw examples of panic, while others saw examples of a pacify longer-term approach. It will be very telling to see how these younger investors react to a protracted downturn in the stock buy. This generation is used to doing business online, but will this carry over to their investments? Intention they be okay with e-mails or social media contact as a means to communicate with their financial advisor? See fit they stay the course with their investment plan? This Baby Boomer can only speculate, but I discretion hope that these robo-advisor firms would do better than communicating with clients via social conveyance and e-mail during a real market or economic crisis.
Rise of the Robo Advisors
Implications for Traditional Advisors
While the most up to date market decline might not tell us much, the reaction of robo-advisor clients to market events like this and succeeding downturns will be telling. Traditional financial advisors provide hand-holding from a real live person during trade in declines.
“Robo-advisors are great in that they invest via a disciplined process and employ a strict set of rules,” said Greg Curry, a fee-only monetary advisor with Pillar Advisors in Louisville, Kentucky. “Problems arise when the human clients circumvent these dominates and diverge from the Robo’s recommendations.”
“In a down market,” Curry added, “many clients need hand judge and the value of interaction with a human financial advisor can be the difference between them sticking with a well-conceived pecuniary plan and investment strategy and making moves that are detrimental to their financial future out of fear.”
Contrary to what some specialists predict, if robo-advisors do not see a mass exodus of clients during the next major bear market then traditional monetary advisors might feel threatened. There may be a realization that many investors don’t feel the need for the human intimation or at least they don’t feel the need to pay additional fees for it. Much will also depend upon the needs of the determined investor including the types of advice and services they require. Any level of complexity in areas like tax planning and retirement revenues planning would be tough to service via a robo-advisor relationship.
Affiliations with Traditional Advisors
With the recent object of Future Advisor by BlackRock and the acquisition of Learnvest by Northwestern Mutual Life earlier in 2015, a trend of more routine financial services firms buying robo-advisors for their technology and/or their knowledge of millennials and other emerging investors appears to be developing.
Vanguard’s Personal Financial Advisor Services unit provides a combination of robo-advisor technology with access to a live out financial advisor. It indicated that their requests for consultations with an advisor were up about 9% during the just out downturn.
Charles Schwab Corp. (SCHW) offers an advisor version of its Intelligent Portfolios robo-advisor via its Schwab Institutional piece. Financial advisors who custody with Schwab Institutional can offer the platform, with some customization if desired, to their customers.
The Bottom Line
One of the unknowns regarding robo-advisors is how their clients will react during a prolonged market downturn. We saw a sample of the communication efforts of these firms during a recent market decline. Only time will be sure how well these firms do on the communications front and how big an issue this is in terms of client retention.