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June 22, 2023 at 04:19 PM
Over the past 15 years, the robo-advisor industry has provided investors, especially those with modest resources, access to diversified, professionally managed portfolios. Their low required account balances, modest costs and ease of use make them a compelling option for young investors who have less complicated financial situations.
Notwithstanding its growth potential, the digital advice industry still accounts for a small percentage of the $31.4 trillion U.S. retail market: some $740 billion as of early 2022, according to Morningstar’s 2023 Robo-Advisor Landscape report, released Thursday.
The report evaluates 18 leading U.S. robo-advisors, focusing on the features that affect how effectively the platforms help investors reach their financial goals: fees, quality of investment advice, financial planning tools and other factors.
The research found broad similarities among major retail-oriented digital advice providers in investor engagement and advice delivery. Most use questionnaires to gather data on client goals, time horizons and risk tolerance, which they feed into advice engines that recommend one of several portfolio options. These are typically low-cost, passively managed funds.
Providers differ more in how much additional financial planning they offer. Most focus on digital investment management, and add some basic features. But the top providers offer comprehensive tools, ranging from online-only counsel to on-demand access to human financial advisors.
The report noted that an ongoing trend toward adding a human touch to robo-advisor offerings suggests that the future will be far from exclusively digital.
Cost is another key differentiator among robo-advisors, Morningstar’s research found. The median advisory fee among those in the survey was 0.25% of assets per year — much cheaper than traditional financial advisors’ typical 1% levy.
But specific fee levels and how they are charged vary. The optimal fee structure, the report said, depends on how much money clients invest and whether they want basic investment advice or more comprehensive financial planning.
The research showed that there is room for improvement. A few robo-advisors remain pricey, transparency needs improvement and some portfolio options are better than others. In addition, it’s still not clear how robo-advisors will incorporate nascent artificial intelligence technology.
See the gallery for 18 top robo-advisors, ranked from the worst to the best, as scored by Morningstar.
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