The rise and stall of robo-advisers

Jason Flores: Robo-advising has not been as profitable as some investment firms expected.

Jeff Jones: Automated investing becomes less desirable as professionals gain more assets.

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In 2008, the financial industry was abuzz with the emergence of the first robo-adviser, led by investment firm Wealthfront. This automated financial tool aimed to be an accessible and low-cost way to manage investment portfolios, using algorithms and artificial intelligence and, in turn, minimal human interaction.

Companies like Betterment and Wealthfront led the charge, using sophisticated algorithms to allocate assets based on factors like risk tolerance and investment goals. According to Investopedia, the technology, which leverages data analytics and machine learning to automatically rebalance portfolios and adjust asset allocations over time, has been around since the early 2000s but was initially available only to wealth managers.

“It’s all we were talking about,” said Jason Flores, executive vice president and chief investment officer at Central Trust Co. “I was worried about my (chartered financial analyst) license, thinking I’d be out of a job.”

Over a decade later, Flores said that the reality of robo-advisers has fallen short of those lofty expectations, despite some of the appeal. 

Robo-advisers entered the market with the promise of automation and accessibility, said Jeff Jones, associate dean for the College of Business at Missouri State University. He said that for individuals who are new to investing or have limited assets, these platforms offer a low-cost, hands-off approach to managing their money.

“For recent grads starting off, they’re likely not going to have a portfolio that justifies professional advisement. As people progress in their careers and accumulate wealth, they might start with these automated solutions before seeking more personalized advice,” Jones said.

According to recent data found by ComparisonAdviser, 42% of surveyed investors in their 30s prefer robo-advisers for their affordability and ease of use, while only 3% of this age group rely on human advisers. Jones noted that as investors progress in their careers and earn more money, their advising needs will be more complex.

Robo-advisers have encountered significant challenges, with trust being at the top.

While more people are turning to technology for investment execution – 56% of self-directed investors now believe access to tech platforms will be more important than human assistance in the next three years – trust in human advice remains strong. According to a 2022 CFA Institute Investor Trust Study, 74% of retail investors still trust human advice over robo-advice, a level that has remained stable since 2020. In addition, J.D. Power found only 22% of investors who use robo-advisers understand how the technology works. 

“While robo-advisers are excellent at managing simple investment portfolios, they lack the personal touch that many investors still value,” Flores said. “Financial planning is not just about numbers; it involves building budgets, discussing personal goals and making emotionally charged decisions about the future. Most people want that human-to-human connection, where the adviser knows where they’re coming from.”

Additionally, the limitations of robo-advisers become apparent in more complex areas of financial planning, such as estate planning or tax strategies.

“That is something an app just cannot do for you,” said Jones. “There’s a lot of emotion in that process; it’s very personal. A good adviser will help their clients get through their process and get to place that they are comfortable.”

Another challenge has been financial viability, according to Flores. The idea was that these platforms would attract millions of users and manage billions of dollars in assets, generating substantial revenue through management fees, he said.

“Even large firms like J.P. Morgan and Goldman Sachs have struggled to turn a profit with their robo-advisory services,” he said.

In late 2023, J.P. Morgan announced it would close its automated investing services due to weak demand, and Goldman Sachs sold off its service to Betterment for an undisclosed amount, which Flores said is signaling that the business model may not be as sustainable as once thought.

According to data by Statista, robo-advisers are projected to hold $1.872 trillion in assets under management by 2028 in the United States, compared with the $85.14 trillion held under wealth managers.

“That’s a small fraction of the total industry,” Flores said.

While Flores said the robo-adviser market has struggled, AI continues to make inroads into the financial planning industry, though in ways that complement rather than replace human advisers. In a 2023 survey by consulting firm F2 Strategy, 51% of wealth management firms report having an AI project in the works, ranging from predictive analytics, workflow automation and chatbots.

“With AI advancing, we’ll see the data collection process get easier, plus help with administration and computational tasks,” Flores said.

However, he added, the application of AI in financial planning is still in its early stages, particularly in areas governed by strict regulations and compliance requirements.

Jones agreed and said there is also concern about the quality of advice generated by AI, especially when dealing with complex, personalized financial situations.

“AI can augment the work of financial advisers, but it’s unlikely to replace the human element entirely,” Jones said.

In Springfield, Flores thinks the adoption of robo-advisers has been slow, with financial planners still seeing a strong preference for human advisers, particularly among older generations. “Even younger generations, who are more comfortable with technology and often start with digital tools, they are looking at trading through zero cost, like with Robinhood.”

The emergence of AI tools and robo-advisers in the financial world has also influenced financial planning education. At MSU, the curriculum has evolved to address the integration of technology with traditional financial advising. Jones said the university has introduced “softer skills” into the curriculum, such as communication and interpersonal skills, to better prepare students for the human side of financial planning.

“We’ve added tracks in corporate investment, financial planning and fintech, reflecting the diverse skill sets needed in today’s market,” Jones added.