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What is Causing the Rise of the Robo-Advisor? Need, Greed or Fear?

robo-advisorRobo-Advisors, those automated wealth advice programs that promise to deliver precision and accuracy for retirement planning (at a low cost), are not exactly the futuristic panacea of sci-fi fantasy. According to a report by Cerulli Associates robo-advisors will continue to expand their market penetration into the defined contribution marketplace, however, it casts doubt on the ability of the robo’s to replace human advisors.

According to the Cerulli report:

Over the past year, it has become apparent that “robo-advisors” are not the fundamental disruption that the traditional financial industry has been concerned about. Instead, they are a catalyst moving traditional advice providers into the digital age, used as an additional tool for enhancing the client service experience.

Weighing cost versus performance versus regulatory compliance considerations, robo-advisors deliver low-cost advice, but is it appropriate? Regulation does not require that sponsors provide the lowest cost solutions in the marketplace, they focus on appropriateness. So when it comes to advice and fiduciary responsibility, will sponsors be abandoning their human advisor partners? That is not likely to happen.

What is more likely according to the report, and consistent with trends in the marketplace, robo-advisors will likely take an important position as a top resource for human advisors in affecting participant outcomes. After all, one size does not fit all when it comes to financial advice, so it will be some time until robo-advisors can adequately and confidently address the multiple variables and human understanding of retirement needs of a participant in a 401(k) planon their own.

Another variable in the robo-advisor debate is the fact that a target date fund from Fidelity or Vanguard, for example, would provide similar results and eliminates the complexities and time required to understand an appropriate investment path through a robo-advisor.

In any case, robo’s may likely continue to put downward pressure on advisor fees; and they continue to grow in popularity. Whether that growth is the result of effective marketing or the fear of missing out on new technology remains to be seen. However, robo’s future is not “set in stone”, as the ebb and flow of government regulation may find favor or dissatisfaction with robo’s merits.

Fred Barstein

Fred Barstein

Founder & Editor-in-Chief at 401kTV | TRAU | TPSU
Fred Barstein is the Founder & Editor-in-Chief of 401kTV. Fred is also the Founder and CEO of The Retirement Advisor University (TRAU), a collaboration with UCLA Anderson School of Management Executive Education and The Plan Sponsor University (TPSU).Mr. Barstein was also Founder and Editor-in-Chief of NAPA Net.
Fred Barstein
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