Robo-advisers may not replace human financial advisers, but they can certainly make it easier for some investors to start on the path to retirement security — and that’s something experts say will continue into the new year.
The use of automated investment platforms, known as robo-advisers, has grown tremendously in the last decade. With these services, investors answer a few questions about their risk tolerance, savings goals and timeline. A portfolio is then generated for them, with guidance on how often and how much to contribute, as well as a visual of how likely they are to achieve their goals.
The growth can be attributed to three factors: increasing accessibility, affordability and awareness of advice, said Brian Concannon, head of Digital Advisor at Vanguard, the investment giant’s robo adviser. “In general around the robo-advisory industry, the future is looking bright,” he said. “There is healthy competition throughout the space and over the last few years we have seen the quality of this industry rise year after year while fees are compressing.”
About 3.5 million investors will have used a robo-adviser for their investment needs in 2021, up 23.2% from 2020, when there was a record growth of 37.4%, according to eMarketer. The growth rate is expected to stay in the double digits for at least the next two years, which means more than 5 million investors will be using these platforms by 2025.
Robo-advisers are not used solely to invest for retirement — people invest for education, homes and even cars — but they can certainly assist in the journey to a comfortable retirement. They can’t take the place of human financial planners, who can gauge emotional responses to market volatility and know to ask more comprehensive questions, such as about estate and tax plans.
Here’s what we can expect to see from robo-advisers in 2022:
More state-based help
Not all Americans have access to employer-sponsored retirement plans, which allow workers to defer a portion of their paychecks into a retirement account in a tax-advantageous manner. States are responding to this lack of accessibility by creating their own state-sponsored retirement plans, using automated investment services that offer individual retirement accounts in a similar manner to employer-sponsored plans. These programs are particularly helpful to small businesses, many of which do not offer plans because of affordability or complexity. This space is expected to continue to grow into the new year, said Edward Gottfried, product manager for Betterment for Business, the retirement plan arm of the online investment firm.
Some institutions, as well as the government, have emphasized the importance of ESG investing, short for environmental, social and governance investing. That will likely continue to grow in 2022 as well, Kristen Carlisle, general manager of Betterment for Business, said during a Barron’s Live event on robo-advisers and retirement planning.
Earlier this year, the Department of Labor proposed broadening the investment options in retirement accounts to allow for ESG options, a nod to its growing popularity.
More attention to personal finances
The pandemic shed light on just how crucial financial planning is for every individual, especially those with little saved for retirement or emergencies. Leaning into one’s own finances is a trend that is expected to continue into the new year — especially as uncertainty swirls around COVID-19, newly discovered variants and local and federal governments respond to this health crisis.
Younger Americans are jumping in to the space as well. This is good news, since they can take advantage of compound interest, which will allow their contributions and returns to grow over time. The bad news, however, is some young investors are dabbling in speculative, volatile trading fads.
“We know stock-picking is hard enough for money managers,” Concannon said. “We view it as some people learn painful lessons, but you go back to the good news side of this story and these investors are young.” One example: the Reddit-fueled push for Gamestop stock trades earlier this year. It’s better to become acquainted with investing and make some mistakes at 26 years old than 62 years old, “when they have decades to get back on track,” he added.
Demand for more benefits
Along with 401(k) plans and employer matches, workers want more help with their finances, and employres are finding ways to answer those wishes. That will continue in 2022, Carlisle said. Employers are responding to this desire by providing financial counseling or benefits tied to student debt relief. While this may not be the same as contributing money into a retirement plan, having an understanding of the big picture of one’s personal finances allows them to free up cash they can then save for the future, or get them on a clear path to retirement security later in life.