Do Americans View Robo-Advisors as a Key Path to Retirement?
Editors' pick: Originally published July 22.
U.S. workers are feeling moderately better about the U.S. economy in general, and about their retirement prospects in particular, according to the latest Wells Fargo/Gallup Investor and Retirement Optimism Index survey .
Overall, the index rose by 22 points in the second quarter of 2016, the highest level since the second half of 2015. The survey tracks 1,019 investors who have more than $10,000 in savings and investment.
Across the board, the Wells Fargo Index rose for non-retirees (by 27 points) and for actual retirees (by 45 points).
While the study claims respondents were fairly bullish on the U.S. stock market, and their prospects for higher household income, Wells Fargo added another category into the retirement optimism mix - robo-advisors. The survey described robo-advisors as "digital advisory services that use computer algorithms to select stocks and other investments for people based on the information people provide about their risk tolerance and goals."
Wells Fargo says that 45% of retirement investors are now aware of robo-advisor digital services, even though 5% have actually used robo-advisors. Yet both those figures are expected to rise.
"Automated investing tools are still in their infancy, but we expect awareness to grow quickly," says Devon McConnell, head of digital for Wells Fargo Advisors. "Similar to online shopping ten years ago, there is an adoption curve and we anticipate the same pattern will unfold as more investors become familiar and comfortable with these new ways of investing."
Other studies agree and show that more U.S. financial consumers will climb aboard the digital financial services bandwagon. For example, according to A.T. Kearney, robo-advisors will be managing 5.6% of Americans' investment assets by 2020, up from 0.5% in 2015.
But 2020 is years away, and right now, some financial services professionals aren't buying reports of heightened enthusiasm on retirement savings from Americans, given current sluggish economic conditions in the U.S.
"Yes, Americans seems to be getting more bullish on retirement, but this increase confidence doesn't seem to be tied to any increase in retirement savings rate or total account balances," says David Rae, a financial planner with Trilogy Financial Services in Los Angeles. "With so many Americans living paycheck to paycheck, it's hard to see how anyone will be able to maintain their current lifestyle in retirement on 60 or 70% of their pre-retirement income."
The bottom line, says Rae, is that people love investing (even with robo-advisors) when the market it going up, and the market has been going up. "On the other hand, they hate investing when the market is going down," Raes says. "If the market turns for the worse, and it's totally normal for it to drop occasionally, the number will also drop for satisfaction with investment, and robo-advisors."
Rae does believe that more and more savers/investors "will give a robo-advisor a try", especially when their retirement accounts are smaller. "Once they grow enough to have a true fiduciary financial planner, I think many people will make the jump and want to work with a real live person they can talk to when they have questions, concerts or outright fear when the market moves," he says.
"And the market always moves," Rae adds.
An American consumer economy increasingly reliant on smart phones and digital apps is helping robo-advisory services look bright and shiny, too.
Dave Edwards, president of Heron Wealth, a New York City-based registered investment advisory firm, is considered an expert in the field of robo-advisory services (he's speaking at the Investment Advisor Association in late July on the following topic: "Practical Application of Robo Technology").
He says its really about perception and optics right now. "Robo-platforms like Betterment have a $100 million annual marketing budget, which gives them massive exposure," Edwards says. "In reality, the robos gained maybe $53 million in assets over the last five years, compared to the trillions that advisor firms support, which is such a tiny portion of the overall market that they're essentially a rounding error."
Yet Edwards acknowledges that "people like easy" and robo-based advisory services provides the easiest on-boarding process around. "They don't have to deal with complicated forms or wait periods," he adds. "Still, robo-advisory technology is still in early adopter stage, so time will tell."