September 9, 2015
To measure the effectiveness of robo-advisors in comparison with human advisors, let’s first understand what "robo-advisors" means in investment management or the FinTech industry in general. Investopedia defines a robo-advisor as an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners. An article in Forbes by Rob Berger lists Betterment, WealthFront, WiseBanyan, Future Advisor, Blooom, Motif Investing and Personal Capital as the Top 7 robo-advisors that make investments effortless.
The recent market downturn in August 2015 was a real test for both robo-advisors and traditional human advisors. In terms of communication via different platforms, robo-advisors stood out from traditional human advisors. According to a blog on Iris by Joe Anthony, robo-advisors were very active in communicating information to their clients via blogs, tweets, messages and emails. However, a few of the traditional wealth management services also tried their best to communicate with their clients. Buckingham Asset Management arranged a live webcast for its clients after the market downturn.
— Buckingham (@BuckinghamAdvsr) August 22, 2015
On the other hand, customers of robo-advisors were tweeting about excellent client communication. Wealthfront was actively tweeting and emailing a blog post by their CEO, Adam Nash, which reminded the users about their investments' long term goals.
The social media was filled with mixed reactions. While some-robo advisor customers boasted about their prompt communications, there were few who complained about the services from robo-advisors like Wealthfront and Betterment. However, many influencers and bloggers in the industry proclaimed robo-advisors to be the winners in client communication. It is still unclear whether robo-advisors generally perform better than human advisors in an economic downturn. Similar market downturns in the future will turn out to be tests for both robo-advisors and traditional human advisors. Such downturns will determine which amongst them will survive in the long run. The question still remains whether robo-advisors can stand the test of time. As difficult times stress their automated communication systems as well as their investment algorithms, the real question is whether they can they really give better investment advice and portfolio returns than humans?