robo-advisors

The robo-advisor industry picked up momentum during the COVID-19 pandemic and the fast-growing industry is showing no signs of slowing down in the coming years. 

What is a Robo Advisor?

A robo-advisor is exactly what the name implies: one part robot (i.e automated) and one part financial advisor. Financial institutions and investment firms have been scrambling over the years to offer some form of a robo-advisor to a new generation of millennials that represents their most important client base over the coming decades.

After all, young and tech-savvy investors don’t want to deal with outdated methods of money management that their parents and grandparents use.

Many robo-advisors also cater to the young investors that prioritize social responsibility across all aspects of their lives, including investing for their future. According to this CI Direct Investing review, investors can allocate part of their funds to a “clean-tech add on.”

The investment options include exposure to the Invesco Cleantech Portfolio ETF that offers exposure to renewable energy, clean methods of transportation, among others.

How A Robo-Advisor Works

Simply put, robo-advisors is a virtual platform that doubles as a personal investment advisor that is always online and always watching over a client’s assets. Recent advancements in artificial intelligence allowed the industry to grow at a very fast rate over the past few years.

A robo-advisor combines the customer’s information such as their financial objectives, salary, and risk tolerance with real-time stock market and other economic data points. Armed with the sheer amount of information that few if any humans can absorb, the robo-advisor selects one or more investment tools that maximize the customer’s returns and lowers their risk profile.

On top of being a tool that is beloved by millennials, robo advisors can play a big role in attracting wealthier individuals who are paying large management fees to a hedge fund or private equity investment fund.

John Zhang, the founder of a robo-advisory startup WealthGap told Forbes:

“Analysis of vast quantities of historical and financial data will uncover alpha opportunities that traditional analysis would otherwise overlook and give robo-advisors an edge over passive strategies and AI can process big data swiftly, allowing robo-advisors to adapt to changing market conditions and consumer behaviors much quicker in order to make better investment decisions. Time saved is key here,”

The Stats Signal Clear Momentum

Statistics and data couldn’t make it any clearer that robo-advisors are more popular now than they have ever been. The U.S. remains the largest market by many metrics, especially estimated assets under management of $682.73 billion and 8.79 million users. This represents a year-over-year increase of 12.4% and 33.4%, respectively.

Data shows that assets under management will accelerate over the coming years at a faster pace compared to 2020. Specifically, assets under management are expected to grow at a compounded annual growth rate of 25.3% through 2024. The math implies that within four years, robo-advisors will manage a total of $1.683 trillion across all firms.

Canadian investors are embracing robo-advisors at similar growth rates. Assets under management in 2020 are estimated to grow by 19.1% from 2019 to $8.84 billion. The total number of users is modeled to grow 24.1% year-over-year to 841,500 in 2020.

The growth rate in Canada through 2024 is modeled to be slightly higher than in the U.S. Assets under management are expected to grow at a 26.5% compounded annual growth rate. At that time, an estimated 1.62 million accounts will be overseen by robo-advisors that manage $22.6 billion in assets.

Robo-Advisors And COVID: An Ideal Match

The global COVID-19 pandemic may have been the black swan event that convinced money managers and investors of the need to embrace new-age technology. There are many reasons why this is the case:

  1. A robo-advisor has no emotion so all decisions are based on real-time data. The most notable lack of emotion is the temptation to make any spontaneous decision based on fear.
  2. Robo-advisors are able to offer something for everyone. Investors that demand stability and safety can have access to legacy blue-chip companies that are determined to be the least impacted by the pandemic and economic challenges.
  3. The long-term outlook remains favorable and a robo-advisor can look past media grabbing headlines like the Dow Jones Industrial Average collapsing nearly 7% in 10 days or oil futures trading in negative territory for the first time ever.
  4. Robo-advisors are programmed to constantly monitor a portfolio and make changes when appropriate and can do so in a time-sensitive manner.
  5. During periods of extreme volatility and ahead of a potential economic downturn, robo-advisors offer customers a much cheaper alternative compared to a human advisor.

Bottom Line: Robo-Advisory Is A Winning Proposition

Some robo-advisory firms noted a triple-digit percent surge in new account openings during the earlier days of the pandemic. Most notably, TD Ameritrade’s robo-advisor opened 150% new accounts on a year-over-year basis. Wealthfront, a pioneer in the robo-advisory space, saw a 68% growth in new account openings.

New and young investors are always eager to sign up for the latest innovation and the COVID-19 pandemic pushed people to take their financial health seriously.