Rise of the financial robo-advisors

An image of logos for Betterment, Wealthfront, and Wisebanyan and the text Rise of the Robo-advisors.

It should be obvious by now that the internet is shattering traditional businesses by democratizing access to information and allowing for technology to reduce costs and simplify transactions. Well the newest target of advancing technology on the internet is the financial advisor. With the rise of robo-advisors like Betterment, WealthFront, and now Wisebanyan, the traditional brick-and-mortar financial advisors are looking like Radioshack and Barnes and Noble of the early 2000’s (that is to say not likely to last much longer). Intelligent Gen-X’ers (born in the 60’s and 70’s) and Millennials (born between 1980 and the 2000’s) are comfortable with technological disruptors and overall tend to embrace them. And the rise of robo-advisors for under 40’s will be another disruptor.

What is a robo-advisor?

So, what the heck is a robo-advisor anyway? Basically, if you’re investing for retirement, you need to be diversifying (aka spreading your risk over a variety of investments). Robo-advisors automatically do this for you by assessing your personal risk profile (aka asking you some questions) and adjusting the percentage of your investments in US and international stocks (riskier), REIT’s (real-estate investment trusts), and bonds (less risky). They only invest in low-cost and no-fee ETF (exchange-traded funds) with low risk and high historical returns. I know I threw some acronyms at you, but don’t sweat the details. Basically robo-advisors make your portfolio better for cheaper.

The traditional way to get this kind of safe diversification is to call up your local financial advisor, pay the old white guy a fee of between 1-2% of your total portfolio value per year and let him pick and choose the stocks and bonds that he thinks will get you the best return with the least risk. The other option would be to go the DIY (do-it-yourself) route and hope that you can beat the market. The problem with financial advisors is that barely .4-16% can beat the market (depending on who you ask). Conservatively, 84% of the time you’re going to pay the guy to not make as much money as you could earn by simply investing in index funds.

So, robo-advisors invest in ETF’s that track index funds, like Vanguard Total Stock Market ETF (VTI) which allows you to simply and cheaply invest in over 3,000 of the largest stocks (aka diversifying over the total market). If you think the US economy will continue to grow, then you should invest in VTI. Wait, but the US economy doesn’t always kill it. Sometimes international markets grow faster and would earn you a better return. Exactly. Diversify. Robo-advise it and keep it cheap and simple.

Why you should use a robo-advisor

  1. Cheaper fees compared to traditional financial advisors (free with Wisebanyan)
  2. Higher chance of not losing to the market (see above)
  3. Automatic diversification
  4. Easy online access
  5. Higher returns than savings account
  6. Safer than picking your own stocks

Obviously, I’m a fan of robo-advisors. Why? Other than reasons above, I believe robo-advisors are the solution to America’s growing debt problem and the key to the middle class rising out of financial sadness. The word depression has been thrown around a lot and it brings to mind the 1930’s and evil Wall Street bankers. But the truth is, depression describes a state of mind – a deep, deep sadness. And that’s the state of the middle-class financial situation – sad… depressing.

Financial education has been disregarded and the common person is losing. With a little education and a bit of convenience, the middle class can rise up to the level of happiness. And financial freedom is one big step towards being happy again.