Yahoo Finance As millennial investors flock to robo-advisors, baby boomers stick with human money managers — which is right for you?
Back in 2008, robo-advisers made their debut, offering financial services with little to no direct human supervision. With low fees and simple online access, it is no surprise that young investors flocked to these digital platforms. Within ten years robo-advisors were handling more than $700 billion in assets under management.
That amount is expected to continue growing. In a previous report by Deloitte, by 2025 at least $16 trillion in assets are expected to be managed by robo-advisors, surpassing the world’s largest asset manager BlackRock, which has about $10 trillion in AUM.
With the use of robo-advisors expecting to grow, are older investors using them or sticking with human advisers? And are younger investors missing out on investment opportunities offered by advisers?
A report by MSCI Inc., a U.S. finance company, described millennials flocking to robo-advisors “more than any other generation of investors.”
A 2019 report by Visual Capitalist also showed that 67% of millennials saw recommendations made by artificial intelligence as being a basic part of any investment platform while both Gen-Xers and baby boomers were more hesitant, with 30% seeing computer-based recommendations as being integral.
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Robo-advisors are easy to access
Stephen Preston, a fintech executive based in Calgary, Canada and a vice-president at Exempt Edge, describes himself as an “anomaly” when dealing with most of his investment portfolios. That’s simply because he enjoys researching and scooping the latest trend on his own.
While he has a DIY approach to investment, Preston has friends and colleagues who are regularly contributing to their portfolios through robo-advisors.
“There is ease when setting accounts and transferring funds with robo-advisors. It (robo-advisors platforms) has very tech-friendly interfaces that have been very well designed,” he said.
However, he acknowledges the generational divide when it comes to incorporating technology to boost investments.
He says his parents would rather trust a human adviser in spite of going through “quite a few ups and downs when it came to finding advisers that were acting in their best interest.”
Different methods for different needs
Daniele Farinaccia, vice-president of Prospr by Sun Life, also says that customers’ needs are “rapidly evolving.”
Canadian company Sun Life recently launched Prospr, a hybrid advice solution, with a digital platform and a team of licensed advisers. The focus is on millennials with a household income of approximately $120,000.
“Clients expect every interaction to be simple, fast, and transparent experiences fueled by innovation and technology,” says Farinaccia.
Farinaccia also sees that there is a generational difference in those who use robo-advisors versus those who have a human adviser.
“In general, we do see a clear distinction in expectations and use of technology by millennials relative to their boomer predecessors,” he adds.
Farinaccia’s clients who are younger than 40, covet technology and 24-hour access to information.
The younger clients, who are happy to meet and work remotely, also “tend to be well-informed prior to speaking with an adviser, rather than relying on an adviser to explain everything,” he added.
Different user profiles
The attraction to robo-advisors is not only driven by comfort with technology among millennials. Traditional investment firms tend to cater to a clientele with at least $250,000 to manage. In contrast, platforms such as Acorns and Fidelity Go allow users to sign up with no minimum deposit. The minimums for other leading services, such as Vanguard Digital Advisor, are $3,000.
The difference in minimum requirements is more attractive for younger (or newer) investors, with less wealth. As a result, robo-advisor clients tend to be more focused on growing money that can be used in the near future.
“In terms of investment choices themselves, they tend to be more time-of-life driven,” Farinaccia added.
“For a younger cohort they are more focused on paying off debt, affording their day-to-day expenses, purchasing a home, and educating their children. Intuitively, they are less focused on retirement planning and legacy.”
Who is investing in traditional alternative assets?
While millennials or Gen Z, might be scoring higher in their digital use, it doesn’t mean that they are profiting the most.
“I'm seeing younger generations not actively investing in alternative investments besides crypto,” says Preston. “Crypto is a very big alternative asset class with millennials and younger generations, but traditional alternative assets like private equity, I'm not seeing the younger generations investing into these products as much.”
Alternative investments are any investment that doesn't trade in the stock or bond markets, including assets such as wine, art, baseball cards or commodities such as precious metals and real estate.
According to RBC’s survey Unit (EIU) with its findings published in 2019, millennials and Generation X — who are 41 to 55 — investors are more keen to explore alternatives over the next five years, including hedge funds and private equity, and newer asset classes like cryptocurrencies in comparison to baby boomers.
Alternative investments require a relatively high minimum deposit. This is why it’s easy for high-income individuals to invest almost half of their money in alternative investments, according to a survey from the global investing firm KKR, while most investors lean toward stocks.
But there is a caveat, with some of these investments, financial advisers are needed.
“Most of these investments are sold through advisers. So if you're not using advisers, you're not going to have access to these types of private or alternative investments,” says Preston.
Robo-advisors not the answer for everyone
At the end of the day, robo-advisors have cheaper fees, can maximize tax efficiencies and offer data-driven advice in real time. But they aren’t perfect either.
“There are some disadvantages to AI, as well,” says Farinaccia.
“If a client wants to understand their holistic needs, AI can be a great tool but alone cannot provide the trade-offs between life, health and wealth,” he explained.
“In these cases it is still best to connect with an adviser to talk about your individual circumstances and tailor a solution for your individual needs.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
