Robo-advisors keep evolving to keep growing

Nothing stays successful by standing still, and that includes robo-advisors.

The first robo-advisors, which emerged in the wake of the financial crisis in 2008, succeeded by meeting the demand from younger consumers for technology that could provide financial advice and a cheaper way to start investing.  Growth over the years has been significant — assets under management in the segment are projected to reach $1.3 trillion this year, according to Statista.

While originally going directly to consumers to bypass the traditional wealth management industry, in the last decade, robo-advisor technology has evolved to keep up with what both users and the industry need.

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New audiences and preferences

Traditionally, wealth management programs targeted those older than 50 because that is where most assets are. Since wealth managers are compensated based on a percentage of assets, it makes sense that they would focus on larger accounts. However, these assets have started to be passed on to younger generations.

These younger audiences often have different investment priorities than their parents and grandparents. For example, younger generations tend to value responsible investment options more deeply. Many robo-advisors have added environmental, social and corporate governance (ESG) investment options to give these investors more opportunity to invest in alignment with their beliefs.

Additionally, mobile capabilities are key when appealing to younger generations. Having an automated investment advisor is not nearly as attractive to millennials or Gen Zs if they cannot access their investments via their smartphone. Robo-advisors have also added different account types like custodial accounts to introduce more options and better coverage, no matter the investor’s preferences.

Keeping up with technology developments is another way robo-advisors have sought to stay useful. Some investment apps are provided by third parties and require extra work on the part of the user to connect bank accounts and make transfers. Providing everything on the same platform makes investments easy to access and manage. Banks and credit unions have a true advantage here, as offering automated investment management through online and mobile capabilities makes the process that much easier and more secure for the user.

Options to automatically rebalance portfolios can also help keep investors on target. Similarly, many robo-advisors have added the option for users to update preferences as their lives and goals change. An increase in income, a career change or even reaching a new life milestone like getting married or growing the family can lead to changes in investing goals. Investing solutions must be able to easily and readily adapt when any investment objectives shift.

Moving forward, the increasing sophistication of AI and machine learning may provide robo-advisors with the ability to support more complex investing needs or consider a broader scope of investor traits and risk appetite.

Time to evolve

Because of the way they have adapted and innovated over time, the popularity of robo-advisors is continuing to grow. In a recent Access Softek survey, 47 percent of respondents said they would consider switching their bank or credit union if the competitor offered integrated investment accounts.

Consumers are embracing the ease and convenience this type of solution can provide. Being digitally native, it can work outside normal business hours to accommodate any schedule. And having investments automatically managed reduces the stress associated with navigating the stock market.

Robo-advisors should not be seen as an add-on service, but as an integral part of a financial institution’s digital strategy. The addition of a digital investment service with a low barrier of entry creates more touchpoints for the consumer and their financial institution to not only engage, but to build a lasting relationship.

Robo-advisors are not new, but they are more useful for today’s digital-first consumer – and to the increasingly digital financial institution – than they were when they were first created. Any solution or institution can learn a valuable lesson from the evolution of robo-advisors: innovation is key to long-term viability.

Mark Allen is senior vice president of new ventures at Access Softek.