The Lowdown on Robo-Advisors

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Robo-advisors or robo-advising has been a buzz word lately but both its meaning and future have been unclear to many. Robo-advising is the practice of providing investment management services, typically online only. The service is provided through programs and algorithms, and therefore excludes the use of human financial planners, face-to-face meetings, or a consistent point-of-contact for service and follow-up. Robo-advisors have access to the same software and information as traditional financial planners, but tend to focus on investment management services only. Therefore, robo-advisors do not offer comprehensive wealth management services such as retirement planning, estate planning and tax management. Because robo-advising utilizes computer programs for servicing, they can cut a great deal of overhead costs associated with employing humans or having a brick and mortar office for you to meet in. As a result, the cost to the end user is lower.

The trend toward robo-investing and robo-advice is gaining momentum, but industry participants are struggling to get a handle on how retail investors view and/or use robo-services to conduct their financial affairs.

Recent research conducted by major asset management firms has gleaned insight, yet often their findings turn up contradictory information. For instance, one study conducted by State Street Center for Applied Research found that 65% of retail investors believe that technology will do a better job at meeting their needs than human advisors.[i] Other research conducted by Allianz Life®, which focused on generational approaches to investing and managing finances, revealed more complex attitudes.

Case in point: When baby boomers and Generation Xers were asked about using robo-advisors, a significant majority (69%) from both demographic groups said they “don’t really trust online advice.” Further, 76% opined that “there is so much selling online that it’s hard to trust the financial advice.”[ii]

The same study revealed that while more than a third of respondents expressed some interest in working with a robo-advisor, just one in 10 would be comfortable having a relationship with an advisor that existed solely online. [iii]

Indeed, study after study on the emerging impact of digital advice is finding widespread ambivalence on the part of investors. On one hand, they are increasingly comfortable with getting their financial information and conducting more business through digital channels, while on the other, they still gravitate toward human relationships when dealing with complex “big picture” planning issues such as meeting their income needs in retirement and setting and managing other long-term financial goals.

Robo-advising has been popular with young consumers who are comfortable conducting financial business online. Because robo-advisors have less overhead expenses, they also tend to have lower account minimum requirements. This has been great for new investors who may want to open an account with $5,000 that would have otherwise been turned away due to the small investment size. However, beware –some robo-advisor platforms that are tied to big financial institutions advertise “no advisor fees” but make up the “lost income” by investing clients’ money in their own proprietary mutual funds, allowing them to collect an internal expense charge.

Robo-advising is ideal for consumers who don’t mind being hands-on, are comfortable conducting business online, and are financially experienced such that they understand the volatility of the market and can keep a long-term investment perspective. There are a great number of robo-advisors available currently, so I would steer those interested towards a company that aligns with their investment philosophy.

Still in its infancy, the world of web-based financial services will no doubt evolve and present exciting new developments in the future.


[i], “Can Advisors Rebuff Challenge of Automated Investing?” February 25, 2016.

[ii]Allianz Life®, ‘ “Robo” Financial Advising on the Rise, But Gen Xers and Boomers Still Prefer the Human Touch,’ February 16, 2016.

[ii]Allianz Life®, ‘ “Robo” Financial Advising on the Rise, But Gen Xers and Boomers Still Prefer the Human Touch,’ February 16, 2016.

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