U.S. investors are turning away from robo-advisors, according to a recent report. After several successive years of increasing participation in digital platforms, U.S. usage declined substantially in 2022, according to Parameter Insights, a company providing data-driven research for wealth management businesses. High-net-worth investors may be migrating to traditional advisor channels with full-service financial planning, the report says. Here’s what advisors should know.
Digital Advisor Use Dropped in 2022
Net usage of digital advisors declined substantially in 2022, according to the September 2022 report. Overall, U.S. digital advisor use dropped from 27.7% in 2021 to 20.9% in 2022. That’s a fall of 24.5%.
High-net-worth investors exited robo-advisor arrangements at the highest rates. Here’s how the data broke down along asset levels:
- $50,000 or less: A drop from 23.6% to 20.6% in 2022, which translates to a decrease of 3 percentage points.
- $50,000 to $99,999: A loss from 39.3% in 2021 to 25% in 2022, or a decrease of 14.2 percentage points.
- $100,000 or more: A decline from 37.3% in 2021 to 25% in 2022, or a decrease of 12.3 percentage points.
- $500,000 or more: A fall from 38.3% in 2021 to 14.5% in 2022, which is decrease of 23.8 percentage points.
High-net-worth clients may be rediscovering old-school advisor relationships and human interactions. “These higher-net-worth customers have been targeted by traditional advisor channels and are being enticed with full-service financial planning,” the report says.
Additionally, younger investors held on to their digital advisors at higher levels than older investors did. And women were less likely to dump their digital advisor than men were.
The Look Ahead for Financial Advisors
In the wake of the COVID-19 pandemic, for example, investors socked government stimulus checks into self-directed platforms with zero-commission trading and online tools. The recent bull market may have also had investors feeling confident in their online trading skills.
But 2022 looks very different. Ongoing macroeconomic concerns and a stomach-churning bear market have some folks ducking for cover. “In the midst of significant market turmoil in 2022, many investors have cashed out or chosen to let their investments sit dormant while weathering the storm,” the Parameter Insights report says.
As markets continue to fall, however, the need for advice and quality investment management services increases. “Many who thought they could do it themselves have been quickly disabused of this notion in the face of significant downturns and market volatility,” the report states.
For banks with robo offerings, the economic climate may open a window to promote the value of their advisory services to current clients.
And for human advisors, especially those targeting high-net-worth investors, this may spell an opportunity to make the pitch for an old-school, human-led wealth management relationship.
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FAQs
High-net-worth clients may be rediscovering old-school advisor relationships and human interactions. “These higher-net-worth customers have been targeted by traditional advisor channels and are being enticed with full-service financial planning,” the report says.
What is the biggest downfall of robo-advisors? ›
Limited Flexibility. Most robo-advisors won't be able to help you if you want to sell call options on an existing portfolio or buy individual stocks. There are sound investment strategies that go beyond an investing algorithm.
What are 2 cons negatives to using a robo-advisor? ›
The generic cons of Robo Advisors are that they don't offer many options for investor flexibility. They tend to not follow traditional advisory services, since there is a lack of human interaction.
Do robo-advisors beat human advisors? ›
The type of advisor that is better for you depends on what your financial needs are. For core investing and planning advice, a robo-advisor is a great solution because it automates much of the work that a human advisor does. And it charges less for doing so – potential savings for you.
Why do clients leave their advisors? ›
Underwhelming performance is a common reason clients leave financial advisors. Your client may expect a certain rate of return, for example, and be disappointed when you're not able to produce it.
Do wealthy people use robo-advisors? ›
Digital Advisor Use Dropped in 2022
High-net-worth investors exited robo-advisor arrangements at the highest rates. Here's how the data broke down along asset levels: $50,000 or less: A drop from 23.6% to 20.6% in 2022, which translates to a decrease of 3 percentage points.
Do millionaires use robo-advisors? ›
Nearly 7 in 10 Millennial millionaires have some money in robos or automated portfolios. Moreover, nearly 20% of Millennial and Gen Z households who know the investment products they own have some money in robos versus only 13% of Gen X and only 2% of Boomer+ households (Boomers and older).
Should retirees use robo-advisors? ›
A robo-advisor can help ease the burden of managing your portfolio as you transition to retirement—and help you figure out how to tap your assets in tax-smart ways.
Can you trust robo-advisors? ›
Robo-advisors, like human advisors, cannot guarantee profits or protect entirely against losses, especially during market downturns—even with well-diversified portfolios. Because most robo-advisors only take long positions, when those assets fall in value, so will the portfolio it has constructed.
Why would you use a robo-advisor instead of a personal financial advisor? ›
Because a person doesn't actively manage your investments, robo-advisors charge significantly lower fees than financial advisors. Additionally, robo-advisors don't require a large initial investment to get started.
You have money questions.
- Top financial advisor firms.
- Vanguard.
- Charles Schwab.
- Fidelity Investments.
- Facet.
- J.P. Morgan Private Client Advisor.
- Edward Jones.
- Alternative option: Robo-advisors.
In general, robo-advisors are less expensive than traditional wealth managers. But an advisor provides a holistic approach to your finances and individualized solutions based on your unique circ*mstances and goals.
Which robo-advisor has best performance? ›
According to our research, Wealthfront is the best overall robo-advisor due to its vast customization options, fee-free stock investing, low-interest rate borrowing, dynamic tax-loss harvesting, and other key features.
How do you get rid of clients nicely? ›
When firing a client, always:
- Check your contract or engagement letter. What terms do you have in place to fire a client? ...
- Maintain your integrity. Stay calm, rational and polite. ...
- Follow-up with a phone call. ...
- Resist the urge to engage. ...
- Give them a referral. ...
- Finish the project, if at all possible.
And here are some guidelines to help you accomplish that:
- Build a customer database. ...
- Keep in touch. ...
- Offer customers multiple communication channels. ...
- Target your most valuable customers. ...
- Recognise customer loyalty. ...
- Treat customer complaints as a gift. ...
- Provide excellent customer service.
As a financial advisor it takes hard work to attract clients, and even more work to keep them. Clients can part ways with their advisors due to poor communication, mismatched expectations, underperformance, lack of personalized advice, trust issues, high fees, and inadequate financial education.
What are the cons of robo-advisors? ›
There are also a few reasons why a robo-advisor might not be a good fit for you:
- Limited Access to Human Advisors. ...
- Narrow Investment Choices. ...
- Might Not Consider All Your Investments. ...
- Tax-Loss Harvesting Isn't Always Helpful.
2 Cybersecurity threats
Another risk of using robo-advisors is that they may be vulnerable to cyberattacks that compromise your data and assets. Robo-advisors store and process large amounts of sensitive information, such as your identity, bank accounts, portfolio holdings, and transactions.
What are the challenges of robo-advisors? ›
Robo-advisory solutions, utilizing automated algorithms and artificial intelligence, present challenges in reliability, security, and scalability. Clients may have limited understanding, and effective communication is crucial for trust and informed decision-making.
U.S. investors are turning away from robo-advisors, according to a recent report. After several successive years of increasing participation in digital platforms, U.S. usage declined substantially in 2022, according to Parameter Insights, a company providing data-driven research for wealth management businesses. High-net-worth investors may be migrating to traditional advisor channels with full-service financial planning, the report says. Here’s what advisors should know.
