Robo-advising

Recently, WorthFM, a new robo-advising platform aimed at women folded just a year after it launched. Betterment, the leader in robo-advising was hit with a $400,000 fine by FINRA recently. With all the hype, are robo-advising platforms and systems living up to their promise?

Robo-advisors are automated systems used in investing and wealth management that have potential to balance accounts and find opportunities for both high–net-worth and mass market customers. Statistical studies show that robo-advising programs have assets under management in the tens of billions as of 2018 with almost a million users.  They operate by using algorithms to keep funds in a balance and performing to a certain goal of return.

Betterment’s fine from FINRA shows how green the investment company is, and the growth pains that robo-investing has experienced. FINRA’s fine assessed to Betterment was for violating the customer protection rule and not properly maintaining its books and records. Other allegations include how Betterment moved assets and recorded them.  And, FINRA also found that the Betterment CEO, who has since stepped down, had little or no training in applying SEC or FINRA rules, despite the fact that he was responsible for compliance. In other words, Betterment built a better mousetrap, but didn’t operate it as promised.

WorthFM shuttered because it lacked the customer acquisition it thought it could bring, as did SheCapital, another female-centric investment platform. But the real problem with other robo-advising platforms may be deeper. Of the brands launched with a robo-advising model, such as Learnvest and Betterment, they may not be performing as thought. Learnvest was acquired by Northwestern Mutual and has since closed its operations.  Betterment took the hit from FINRA, shuffled the c-suite and continues to move on. In July of 2018, more robo-advisor platforms bit the dust as well, including Hedgeable, a New York based model.

The robo-advising model was thought to be popular with Millenials who love algorithms.  Instead, Millenials seem to be tracking to Acorns and Stash Investing – two micro-finance systems that help people save for retirement. Acorns rounds all purchases made with a debit card up to the next full dollar and puts the difference into a retirement account tiny pocket change by tiny pocket change.

Millenials seem to want the face-to-face interaction of working with an advisor for the financial planning aspect, and are happy to leave the rebalancing to the robos. In fact, Millenials are twice as likely to use a traditional advisors than robo-advisors.

So how are so many assets under robo-management, but so many robo-managed platforms getting crushed? Schwab, TD Ameritrade, Fidelity among others all have robo-advising segments. 

Robo-advisors and their algorithms only adjust for lifestyle and return profiles and market risk. And, robo-advisors seem to help adjust and readjust to maintain a level of return. While that is helpful, and certainly lowers fees, it may lose the personal touch of adjusting risk and understanding human emotion, say financial experts.  On a strict performance metric, robo-advised funds were beat by Vanguard human managed funds when compared side by side (using Betterment for the robo-advisor).

So, are robo-funds living up to the hype? Well, sort of. The three upsides to robo-advised funds are still proving true. Robo-advised funds make it easier to contribute to an account. They diversify and rebalance automatically. And they are cheap to maintain.  This may be why large firms like Schwab have taken some elements of robo-advising and brought them into their fold. Schwab’s robo-advised funds are very low cost, but allow for access to humans for advice. The future of robo-advised funds may be the mix of easy to contribute apps, like Acorns, with balancing and rebalancing by algorithm and planning by humans.