Robo-Advisors vs. Financial Advisors
For technology-loving millennials, robo-advisors may seem appealing. With a robo-advisor, a portfolio is managed online by using software algorithms instead of a real person.
It makes sense millennials would flock to robo-advisors, but they’re not, according to a LendEDU study. The study uses information from an online poll involving 502 millennials in 2017, and all of those respondents were currently saving for their retirement. The purpose of the study was to gauge whether millennials preferred working with robo-advisors or traditional financial advisors, and to figure out why.
The Growing Popularity of Robo-Advisors
Whether millennials are utilizing them or not, there is no arguing robo-advisors are enjoying a big boost in popularity. And there are good reasons behind that spike.
There are plenty of reasons to like robo-advisors, low fees and low minimum balance requirements being chief among them. Robo-advisors charge lower percentage fees than traditional advisors – their services might be free or cost up to one percent, while a traditional advisor might take as much as one to three percent. Some of the most popular robo-advisors, like Betterment and Stash, charge a low fee between .25 percent and .50 percent. That can add up to a huge amount of money over time, and it could potentially be enough to delay retirement by months, if not years, if the earnings were to be the same from either service.
Potential clients don’t have to be mini moguls to get a robo-advisor either. With traditional advisors, it’s hard to get their interest unless a client has at least a six-figure portfolio. A lot of robo-advisors don’t have a minimum balance requirement, which can be attractive to people who want to get started on the road to riches but don’t have many assets yet.
Another perk to using a robo-advisor is whenever clients want to utilize them, they’re available – they never sleep and they don’t close up shop for the day.
These advantages account for some of the reasons robo-advisors are expected by 2020 to be in charge of 10 percent of all global assets under management.
Millennials Are Most Likely to Use Traditional Financial Advisors
The conveniences of using a robo-advisor aren’t enough incentive for most millennials though. In the LendEDU study, 53.59 percent said they weren’t assisted by a financial advisor at all. But of those who were, 46.41 percent were working with a traditional financial advisor, compared to only 24.30 who were working with a robo-advisor.
While this may not seem like a good sign for the future of robo-advisors, it might not be as bad as it looks. Of those who reported in the poll that they hadn’t used a robo-advisor, 61.58 percent said they hadn’t because they weren’t aware they existed.
Robo-Advisors Believed to Be More Likely to Make a Money Mistake
Millennials appear to have more confidence a human advisor will make fewer mistakes than robo-advisors. When asked who they believe would be likelier to make a managing error with their money, 51.59 percent of the polled millennials said a robo-advisor while 48.41 percent said a human advisor.
In addition to making fewer mistakes, most millennials think their portfolios would grow better under the watchful eye of a traditional advisor. Of those polled, 68.92 percent thought they would get better returns from a human advisor and only 31.08 percent thought a robo-advisor would grow their money faster.
Financial Advisors Can Be Expensive or Intimidating, but Human Touch Is Appreciated
Despite some of the drawbacks with scheduling and expenses, 9.01 percent of millennials using a traditional advisor in this poll said they like the human touch that robo-advisors can’t provide. For millennials who still value that human touch, it might be a tough sell to get them to switch over to robo-advisors in the future – despite the conveniences they offer.
By Mike Brown
Michael Brown is a Research Analyst at LendEDU, a personal finance company. Michael uses, develops, and analyzes data from a variety of sources to tell a story and identify trends in the personal finance space. A graduate of the University of Delaware, Michael enjoys attending major horse racing days, hiking with his dog, and reading about Ancient Roman history in his spare time.