After bursting on the financial services scene after the 2008 crash, robo advisors now face their own full-fledged market crisis.
Amid the volatility and uncertainty, our firm sees three emerging themes arising from the cornonavirus’s impact on robo advisors.
1. Goals-based planning will reap rewards
Economic shocks like the coronavirus highlight the power of goals-based planning. Investors following goals-based planning philosophy via robo advisors base their investments primarily on the risk capacity aligned to their goals. The strength of this approach is that higher-priority, near-term goals will include lower-risk asset allocation, thereby minimizing the impact of short-term economic shocks.
2. Short-term asset allocation shift and long-term perspective
An inherent feature of robo advisors is risk-based portfolio selection. Most offer passive investments with low fees, though investors may adjust allocations as they see fit. Given the recent market downturn, some investors are moving to less-risky asset allocations, like bond ETFs, to avoid downside risk. These are market expectations, and those same investors will likely also consider returning to equities when the market bounces back to capitalize on market gains. There is often a disconnect between long-term investing and short-term economic reactions in economic downturns like this one. Historically, disciplined and experienced investors’ portfolios have benefitted over time due to their measured long-term approach.
3. Human communication with clients is key
All wealth management firms are spending time guiding coronavirus-impacted clients — both personally and economically. Even with a high level of digital interaction, clients frequently feel best-served by human advisors in uncertain market circumstances. For robo advisors, communication will take on a slightly different form than traditional advisory firms. They will need to lean on digital collaboration tools at their disposal through email, push notifications and in-app notifications. Innovative tools like chat functionality or video conference to connect with a team of advisors could help robos provide a human touch needed to ease clients’ anxieties during troubling times. Robo advisors such as Betterment and Personal Capital already offer financial advisor access with their premium services.
Robo advisors may consider offering additional life planning functionalities to prepare clients for events such as job loss during market crises. Preparing for these events and associated trade-offs in advance helps the client reduce stress if or when the event occurs.
For example, clients need to understand the trade-offs they would make if they lose their jobs. Clients will need to know how long they can afford to be out of a job while continuing to pay the mortgage, additional premiums for continued insurance coverage for family, saving for college and other necessities. In order to do that, clients may have to tap into emergency savings, cut spending, cancel upcoming vacations or spend less on aspirational purchases.
Ensuring clients are prepared and know their trade-offs in advance is the real value-add of financial planning.
