Does a Robo-Advisor Make Sense for You?

“One of the challenging things in this industry now is you've got a lot of the old-way-to-invest type of firms coming out with me-too offerings that they call robo-advisors. But there’s no technology there. There's no real service there. There's no customer-aligned value proposition.”Jon Stein, CEO of Betterment.


The internet has disrupted virtually every industry from cinema to automobiles.  Until 2010, financial services have been relatively unscathed.  That’s starting to change as investors are embracing lower cost solutions driven by web & mobile-based technology. 


What are the benefits and drawbacks of using a robo-advisor?  What are the challenges for the emerging industry?  What trends could reshape the service model for investment managers and clients?


The Case for Robo:


  • Low-cost– average robo-advisor fee of .25%-.50% vs. 1%-3% for working with a traditional financial advisor.  

  • Transparency – 24-hour access to holdings and performance.

  • Straight-forward needs– great for young savers looking to build wealth.  Paperless on-boarding, automatic monthly contributions, and no investment minimums are more investor-friendly than traditional channels.

  • Evidence-Based investing principles–robo-advisors only use low-cost ETFs and focus on maximizing net after-tax returns (tax loss harvesting).  See "What is Evidence-Based investing?"

The Case Against Robo:


  • Untested during a full market cycle- the market has gone straight up since the first robo-advisor came online in 2010.  Humans will want to talk to other humans during market stress.  Given the inexperienced nature of many robo-investors, abandoning investment plans during market dislocations is a real concern.  For example, as Brexit unexpectedly unfolded, Betterment was bombarded with calls and decided to freeze client investment accounts.  

  • Viability of an “all robot” solution– many robo-advisors are realizing they need human advisors on the back-end. Link about robo pivoting to human advisors.

  • Complex client situations– limited expertise and resources to address financial planning, risk modeling, estate/trust, tax needs.

  • Age-based portfolio construction rules– robo-advisors may fail to adequately capture risk tolerance relying on antiquated age-based methodology.  You can read more about our thoughts on risk and portfolio construction here. 

  • Lack of Customization– robo-advisors work best for IRA accounts (no tax consequences for rebalancing) or cash funded taxable accounts.  Low-cost basis holdings would be automatically sold if they fell outside of the core model, resulting in capital gains.

  • Service Issues– robo-advisors are not equipped to deal with large call volumes.  See “At Vanguard, Customer Complaints Rise Along with Assets."

From a business standpoint, the robo-advisory industry faces several challenges.  While valuations are pricing in robust growth, most robo-advisors are not currently profitableAaron Klein, CEO at Riskalyzesaid, “The self-directed robos are stuck…the customer acquisition costs are rumored to be $825 for a customer averaging $63 in annual revenue.”


Aiming to reach profitability, some robo-advisors have begun to offer a higher service tier for access to human advisors.  This sounds good in practice; however, we wonder if “investment talent” would be interested in having zero investment authority while sitting in a remote call center?  In our opinion, robo-advisors are going to have a tough time attracting and retaining true investment professionals.


Traditional investment management firms and big banks are getting into the robo-advisor space to service smaller accounts and complement their human advisors.  These deep pocketed firms have the resources to develop technology, but their obsession with maximizing revenue could limit their effectiveness.  The whole spirit of the robo-advisor platform is to deliver lower cost solutions through technology.  It’s tough to do that when brokers and big banks are already being accused of funneling clients toward proprietary products or receiving kickbacks from preferred mutual fund/ETF families.


Pure Portfolios fully embraces utilizing technology to build, optimize, and deliver investment solutions to wealth management clients.  We are designing our own Pure Portfolios branded robo-advisor to complement our core services that leverages our asset allocation framework and evidence-based investing principles.  We believe technology in partnership with independent, professional human investors is the future of wealth management. 

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