“Algorithmic advisors,” “technology-driven investment managers,” or as the popular press has dubbed them, “robo-advisors,” are just a few of the terms used to describe companies that provide automated investing. These companies use basic inputs such as an investor’s age, financial position, goals and risk appetite into a company-specific proprietary algorithm to create a diversified basket of exchange-traded funds (ETFs) or other funds. The portfolio will generally include a mix of stock funds, bond funds, commodity funds and cash. Robo-advisors typically target smaller investors with uncomplicated portfolios, whose situations are more suited to this approach. Fees range from around 40-65 basis points, including fees charged by the funds in which they invest. While some robo-advisors offer features like automatic tax-loss harvesting, they cannot assist in setting up trusts or other more advanced estate tax planning undertakings. As the moniker suggests, most robo-advisors have little to no human interaction with an actual flesh-and- blood advisor, which is how they are able to charge such small fees.

Last year was one of explosive growth for the robo-advisors. At the end of 2014, these companies had combined assets under management of $19 billion, a 65% increase over eight months. Larger, traditional asset management firms such as Fidelity, Vanguard and Charles Schwab have all jumped into the space with their own robo-advisor platforms to compete with standalone companies such as Betterment and Wealthfront.

Attractive features of the robo-advisors include quick and easy account set-up, low cost structure and effective user interfaces and mobile apps to appeal to millennials, the generation that appears to be the target market. For example, Wealthfront boasts on its home page that “hundreds of employees of companies like Facebook, LinkedIn and Google are Wealthfront clients.”

The robo-advisors provide a simple and effective starting point for smaller investors who only need help with asset allocation. However, as investors’ net worth increases, they need both an unbiased sounding board and someone who is well-versed in all aspects of wealth management. Investors at this level typically need the broad expertise and experience that a wealth advisor can bring to balancing risk/return, income and estate tax management with the human concerns most important to each unique individual.

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