Robo advisors have been on the scene since 2008, the year of the financial crisis. The first big-name advisor, Betterment, was launched in 2010 by Jon Stein, a young fintech entrepreneur. The growth in robo advisors has been pretty spectacular; in 2015, there were $60 billion in assets under robo management, and the industry is on track to have $2 trillion under management by 2020.
Prior to robo advisors coming online, newbie investors could either take a DIY approach to managing their portfolio or hire a financial advisor to do it for them. Neither of those options were especially beneficial for young investors just starting out; they lacked the knowledge and quite often the time to do it on their own, and their portfolios were too small to interest most professional advisors.
Robo advisors stepped into that gap, and new investors flocked to them, which is probably why even major firms such as Vanguard and Fidelity have gotten into the robo advisor game with hybrid products to appeal to young and inexperienced investors.
From a practical standpoint, robo advisors make a lot of sense for an investor just starting out. They offer a low-cost way to build a diversified portfolio designed to meet their personal investing goals. Most robos offer a variety of portfolios to choose from, with many offering options to customize. Some even offer unusual asset classes to further diversify and capture profit from markets that may be difficult for novice investors to break into.
There are many other reasons new investors love robo advisors. Most are mobile-friendly and function intuitively; it’s very easy for a new investor to open an account and start investing. You can choose to set automatic recurring deposits—but it’s equally easy to transfer over an extra $50 to boost your account. Most have no account minimums or minimum deposit requirements, putting professionally managed portfolios within reach of just about any investor.
They also handle things like automatic portfolio rebalancing and tax loss harvesting, which are outside the skill set of most retail investors.
There are, however, potential disadvantages to investing by algorithm. The industry is relatively new and hasn’t operated in a bear market; robos have been functioning in the context of the longest bull market in history. It remains to be seen whether their portfolios will hold up as well as one managed by human advisors.
One final thing to consider is the growth in affordable fee-only financial advisors. In the past, new investors couldn’t typically avail themselves of human advisors who operated on a percentage basis for portfolio management. Now a new investor can pay a relatively low flat fee to get personalized investment advice, which may appeal to those who aren’t quite ready to go robo.