Persuading employees to engage with their benefits options is like finding Cinderella armed with just a shoe: it’s about finding the right fit. For new investors, those with low investment capital, and straightforward finances, robo-investment can be an excellent fit.
Times certainly have changed, in large part due to technological leaps and bounds. Not only did we put a man on the moon, but we carry small computers in our pockets with several times the processing power than the computers responsible for doing so. Now firmly in the 21st Century, robots are vacuuming our houses, driving our cars, and even investing our money. But are these good things? While the robot vacuums are a resounding yes, the robo-advisors are a bit more complicated.
Let’s start with the basics: what is robo-investing? For the uninitiated, robo-investing is exactly what you’d think it is: automated investing that uses algorithms designed by investment professionals and data scientists, where the act of investing involves little-to-no direct human interaction for the client. While automated portfolio management was available to advisors, when Betterment (the first robo-advisor) launched in 2008, the significant difference was in their direct to consumer approach that circumnavigated the need for a human advisor entirely. However, there are also hybrid models that use a combination of algorithm-driven investment strategies and human touchpoints.
When it comes to benefits enrollment, sponsors become physicists as they struggle to battle inertia. While it’s easier to get those who are already enrolled and emotionally (and financially!) invested more involved in the choices informing their financial future, the first step, actually getting employees to initially engage, is often both the hardest and most important. There are several barriers to enrollment employees may cite, including individual financial needs and habits, being ignorant of one’s benefit options, and a lack of investment and financial literacy, to name a few. However, when pitching robo-investment as an enrollment aid, there are several benefits that the service can overcome some of these roadblocks by its nature. As an algorithmic-driven service, robo-investments can lower both the emotional and educational barriers to entry for new investors and additionally requires little input or financial literacy from clients, and as an automated, unemotional process. This may ease the minds of investors who worry about human fallibility, and studies show that the cold, calculated, computational strategy can help robo-investors get ahead of humans when the going gets tough. Additionally, rather than requiring tens or even hundreds of thousands of investment capital, robo-investment platforms are much more accessible with low to no account minimums, and significantly lower fees.
There are of course drawbacks that sponsors should highlight to employees. For example, although their unemotional approach to a highly emotional field can give robo-investing clients an edge, algorithms are still built by humans who have biases, and are not infallible. Additionally, they work best for those with straightforward, uncomplicated financial situations who are additionally computer-literate; human advisors are near-universally recommended for those with more complex investment strategies and financial pictures, or if they have difficulty navigating online platforms. Additionally, they can rely heavily on an investor’s stated risk tolerance, which can be, well, risky. Lastly, they can’t help investors weigh their options, or decide between insurance options, or provide information too specific to an individual investor’s needs due to the limited nature of the product, so if a robust library of abilities is something an investor values, they’re likely better off with a real person.
Persuading employees to engage with their benefits options is like finding Cinderella armed with just a shoe: it’s about finding the right fit. For new investors, those with low investment capital, and straightforward finances, robo-investment can be an excellent fit. Introducing the idea of robo-investment and weighing the pros and cons can be a great way to get employees’ to sign up. For some, they may simply be interested in the hands-off, set-it-and-forget-it aspect; for others, it can be the first step in a long and profitable journey to better money management. There’s no one “right” way to approach investment, and robo-investing is a strategy sponsors can use that may speak to those who otherwise feel left out of the investment world.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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