If you follow the stock market closely – or even if you don’t – you have likely seen the roller coaster of headlines in the last two weeks. CNBC ran the headlines “Dow surges 2,900 points” and “Dow drops 1,700 points” less than 24 hours apart last week.
This up-and-down ride is very confusing for a lot of people, leaving many unsure of what it means for their retirement accounts. While some people may be able to turn to a financial advisor for advice, not everyone can afford that kind of one-on-one personalization. Instead many Americans have turned to robo-advisors over the years to help them manage their financial goals.
What is a robo-advisor?
A robo-advisor is a digital platform that provides automated, algorithmic investment services with minimal human supervision. These platforms run on technology that optimizes Modern Portfolio Theory, a theory that selects investments based on the investor’s accepted level of risk to maximize returns. Robo-advisors put this theory into practice by first understanding an individual’s expected return on their investment by asking clients to complete a brief survey about their goals for the service. The robo-advisors can then use an algorithm and AI technology to create a portfolio capable of achieving that goal with the lowest risk possible for that individual.
The downside of using a robo-advisor is that they don’t allow much wiggle room for personalization or flexibility on which funds or stocks to invest in, and there is almost no human contact. Instead, the service is geared toward the more passive investor who doesn’t want to spend the time following their investments or beginners who are just dipping their toes into the financial market.
Another reason robo-advisors are a good option for beginners is that they often require low opening and minimum balances and are relatively inexpensive to use. Many have management fees as low as 0.25% of assets managed or flat fees of a few dollars a month, whereas a traditional advisor may charge 0.5% – 2% of assets managed or work for flat fees of $1,000 – $3,000 depending on the service needed.
The history of robo-advisors
The first time the term “robo-advisor” appears to have been used in print was in a 2002 edition of Financial Planning magazine. An article ran with the headline, “Robo-Adviser: In a new world of intense 401(k) anxiety brought about by the Enron fiasco, the only hand investors may have to hold may be digital.”
With that in mind, it is no coincidence that the first robo-advisors were launched shortly after the 2007-2008 financial crisis when many called for more transparency, affordability, and accessibility for the average investor. The first robo-advisors, Betterment and Wealthfront, were both founded in 2008 with that exact goal.
In 2015, Charles Schwab launched its Intelligent Portfolios, making it one of the first big investment companies to join the robo-advisor bandwagon. It wasn’t long before some of the biggest names in investing including Vanguard, Fidelity, and Merrill created their own robo-advisor programs for clients.
The technology used in these platforms wasn’t new, but previously only wealth managers and their clients were able to benefit from it. These new platforms allowed individuals to start investing with a few clicks of their mouse using proven strategies tailored specifically to their financial situation and goals.
The current state of robo-advisors
Globally the robo-advisor business was valued at $8.39 billion in 2024 and expected to grow to $69.32 billion by 2032. However, just like many industries, that growth doesn’t come without some casualties and growing pains.
Over the past 15 years, new robo-advisors have popped up only to be sold or acquired by larger entities, demonstrating the need for economies of scale to thrive in this industry. Schwab announced in November that it was discontinuing its own robo-advisor service and transitioning its clients to iRebal, a company it had recently acquired. In February, Betterment announced that it would be acquiring the robo-advising business of Ellevest, an investing company started in 2014 with the mission of “getting more money in the hands of women.”
Last April, Betterment also acquired the robo-advising business of Goldman Sachs while J.P. Morgan shut down its services altogether in 2023 stating weak demand. This has left a handful of big companies to dominate the entire industry and fewer options for average investors to choose from.
