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
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 financial advisors? ›
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.
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.
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.
Why are more younger people using robo-advisors instead of human advisors? ›
Robo-advisors are believed to appeal more to younger people because this demographic tends to trust robots more and prefers doing everything online. Robo-advisors are also more accessible in terms of cost and the amount you can invest.
What advantages do robo-advisors have over their human counterparts? ›
Advantages of Robo-Advisors
Robo-advisors offer traditional investment management services at much lower fees than their human counterparts (financial advisors). The minimum amount required to use such types of software is also much lower than the minimum amount required by financial planners.
Why advisors are quitting? ›
Lack Of Fulfillment
They are required to spend their days selling products and services they don't believe in. Far too many advisors find themselves working 9-5 (or worse) at a job that doesn't fulfill them or make them happy.
How long does the average client stay with their financial advisor? ›
For instance – did you know that according to a study1 from Etrade Advisor Sales in 2019 – the average percentage of clients that leave during a given year is 20% within a year. And 25% within one-two years. Or - put another way - roughly one-fourth of new clients may leave within the first two years.
Why do so many financial advisors fail? ›
A lot of failure within the financial advisor industry comes down to either not knowing or not practicing the fundamentals. For example, every financial advisor should prospect and follow up - that's a fundamental thing. However, when advisors don't prospect, they put themselves in danger of failing.
Do robo-advisors beat human advisors? ›
Robo advisors fall short of qualified human advisors in several ways. Among most platforms, the main service offered is portfolio management, which is a small part of what a qualified human advisor does. Here are the additional roles that many qualified human advisors take on.
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.
Are robo-advisors beating the market? ›
Do robo-advisors outperform the S&P 500? Robo-advisors can outperform the S&P 500 or they can underperform it. It depends on the timing and what they have you invested in. Many robo-advisors will put a percentage of your portfolio in an index fund or a variety of funds intended to track the S&P 500.
Will robo-advisors replace financial advisors? ›
So, have robo-advisors effectively replaced financial advisors? The short answer is no. Robo-advisors are valuable tools, even to the point that some financial advisors use them. However, one of the advantages technology grants humans is the ability to focus on more significant, specialized tasks.
What is the future of robo-advisors? ›
Robo-advisors have certainly grown in popularity. According to figures from Statista, a projected $2.67 trillion will be under management by robo-advisors by the end of 2023 — and that figure is expected to grow to $4.53 trillion by 2027. “If you're not a hands-off investor, robo-advisors aren't a good option for you.
Can you lose money with robo-advisors? ›
Can You Lose Money with a Robo-Advisor? Robo-advisors are much quicker to respond to changes in your assets, but they are not able to predict market outcomes. It is just as possible to lose money using a robo-advisor as it is using a human advisor.
Is a robo-advisor better than an advisor? ›
However, a robo advisor is often suitable for a young investor who doesn't have a lot of money in the market and doesn't yet need a comprehensive financial plan. For investors whose situations are more complex, a financial advisor is usually the preferred choice.
Are robo-advisors better than humans? ›
For those who have more straightforward goals, a robo-advisor may be a good fit. But for those who have complex financial needs and want more of a personal touch, a human advisor may prove the best option.
Are robo-advisors better than traditional financial advisors? ›
If you require a high level of personalized service and direct management of your investments, a traditional human advisor might be better suited to your needs. Conversely, if cost and simplicity are your primary concerns, a robo-advisor might be the better choice.
What is a disadvantage of using a robo-advisor? ›
Some robo-advisors only offer human support for tech- and account-related questions, which means there's no one to answer questions about your investments. Others have a hybrid model which may give you access to human advisors.
