It is estimated that in 2023, $1.17 trillion is under the management of Robo Advisors. 
Robo-Advisors were introduced to the public in 2008 to help smaller, less wealthy individuals gain access to the world of investing. Contrary to popular belief, Robo-Advisors aren’t Robots executing trades on the floor of the New York Stock Exchange. They are technology platforms driven by algorithms that automatize investing based on a client’s personal goals, risk tolerance and finances. Robo-Advisors charge significantly lower fees than financial advisors. However, the savings you get in the short-term may under-pace account gains in the long-term, especially if you’re not actively managing the accounts.
Robo-Accounts can be set up and managed from just about anywhere that has an internet connection. Robo-Advisors have low account minimums. They determine what funds to invest based on your answers to a Suitability Questionnaire. Suitability is a practice in the financial world that determines a client’s risk tolerance (how a client will endure the predictable ups and downs of the market), time horizon (how many years a client has to invest until retirement), and investment goals. One difference between a Robo-Advisor and a Financial Advisor is that a Robo-Advisor sends you a questionnaire to fill out. A financial advisor will meet with you face-to-face, listen to your expectations, make suggestions and take an active role in managing your account(s).
Robo-Advising platforms are also limited. If you open an account with a Robo-Advisor, you likely will only be offered investments from a preselected batch of funds. This strategy may work well with people just starting out. However, studies have shown that investors benefit from having a well-rounded, diversified portfolio. Financial advisors also bring years of education and experience to the table. They are able to offer a variety of product choices to their clientele.
Human advisors also understand the nuances and complexities of the market. They also have a fuller picture of what their clients are invested. This means if the stock market drops, your advisor can make changes that will protect your investments from a loss of capital. Of course, no capital loss can be guaranteed, as all investments carry inherent risk; however, having a human watching out for you, as opposed to a robot monitoring your accounts, can make a big difference over the long-term.
It is estimated that in 2023, $1.17 trillion is under the management of Robo Advisors. Compare that with the $114.1 trillion managed by human advisors and you can see that while AI-generated platforms are gaining ground, there’s still a long way to go. There will always be the next best thing and AI certainly has a place in the financial services industry. However, it is a tool to use to assist advisors and clients to come up with a comprehensive plan for now and in the future. QCBN
By Steve Schott
Steve Schott has been a financial advisor since 2010. His expertise in business ownership and capital management spans banking, office products, office machines and autos. A former owner of Prescott Honda, Steve holds an MBA from the University of Arizona and a Bachelor of Science in Finance from the University of Denver. Steve is a proud graduate of Prescott High School and an avid community volunteer. Steve purchased Tomlinson Wealth Management from his predecessor, Andy Tomlinson, in 2019, making Schott Financial Management a third-generation financial firm in Prescott.
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