Rebooting Robo-Advisory: Can the Industry Meet Investor Demands for Personalization? (Part 1)

On Sept. 15, 2008, the collapse of Lehman Brothers catalyzed a seismic shift in investor sentiment, highlighting systemic risks and prompting widespread scrutiny of traditional financial institutions. This crisis exposed unsustainable industry practices and fueled a surge in public distrust.

Amidst this upheaval, robo-advisory startups like Betterment and Wealthfront emerged, offering a compelling alternative built on digital platforms and algorithmic decision-making. This innovation promised much-needed transparency, cost efficiency and objectivity, directly addressing public concerns while offering new digital experiences that aligned with customer expectations. 

Despite their initial promises, however, robo-advisors faded from prominence as they failed to adapt to evolving investor expectations. With the emergence of new technologies – and advancements in other areas like generative AI (genAI) – robo-advisors have an opportunity to revitalize the sector by personalizing experiences beyond the capabilities of traditional platforms. 

In this two-part series, we'll examine this potential transformation. Part one will analyze the history of robo-advisory and the shortcomings of existing technologies that have created a disconnect with investor needs. In part two, we'll explore how genAI can bridge this gap, creating services that truly align with what investors demand.

Back to the Basics

Robo-advisors are platforms that deliver automated, customized and strategically allocated investment portfolios directly to individual investors. These platforms offer:

1. Simplicity and transparency through widely-used and commoditized portfolio management strategy offerings, providing a detailed level of reporting that conforms to industry-wide rules and regulations.
2. Low fees and little-to-no minimum account balance requirements, making it an affordable option for millennials and Gen Z.
3. Convenience and accessibility through digital applications and interactive tools, with real-time dashboards and customer alerts readily available.

Despite the benefits to investors, robo-advisors today face uphill battles to reach sustainable profitability. Early startups like Wealthfront and Personal Capital sought exits through acquisitions by established firms, highlighting the difficulty of scaling within a competitive market dominated by incumbents like Vanguard and Schwab. 

Even large players are struggling to integrate digital advice capabilities. Case in point: JP Morgan Wealth Management recently announced it would discontinue its automated investing program in the second quarter of 2024; BlackRock sold its FutureAdvisor platform to Ritholtz Wealth Management; Blooom, a retirement-plan robo-advisor, recently shuttered its services; and Northwestern Mutual’s LearnVest and John Hancock’s Twine also joined the ranks of closed products. 

Despite the advantages, why haven’t robo-advisors achieved more widespread adoption? Equally important, what behavioral or psychological factors create resistance among potential investors?

It’s Time to Get Personal

One of the primary barriers to the lack of robo-advisory growth lies in personalization. While technological convenience draws initial interest, investors prioritize emotional guidance and tailored support in financial decision-making. According to EPAM’s 2024 Consumer Banking Report, key market segments (70% of 18-54-year-olds and 77% of high-income individuals) place significant value on personalized experiences, offering a strategic opportunity for client acquisition and retention within wealth management. 

When comparing a human financial advisor to a robo-advisor, the most significant distinction lies in the human advisor’s capacity to provide emotional guidance. Money is an emotional matter; meeting face-to-face enables clients to make rational decisions and overcome their impulses. Behavioral coaching and personalized support foster positive habits that can lead to long-term financial security. Moving beyond emotion, our recent consumer banking research showed 68% of respondents wanted personalized financial education, a demand genAI is capable of delivering but current robo-advisor products fail to deliver.

This is why research from Phoenix Marketing and Cerulli Associates also indicates that only 5% of survey respondents expressed a preference for working with an online-only advisor. Similarly, a Vanguard survey found that more than 90% of clients currently working with a human advisor said they would not consider switching to a digital advisor, but 88% of clients currently working with a robo-advisor would consider shifting to a human advisor. 

Clearly, navigating financial milestones like retirement savings, funding a child’s education or purchasing a first home often necessitates support services with a nuanced, empathetic touch that supports long-term goal attainment. The majority of investors don’t yet see that reflected in the robo-advisory products they are being offered – and that’s a mistake.

In fact, the majority of robo-advisory services on the market today are marked by a lack of premium and personalized experiences. Customers are often subjected to:

1. Simplistic surveys that generate recommended investing profiles based solely on risk tolerance. This misses an invaluable opportunity to understand an investor's true capacity for risk, long-term objectives and the unique life events that could shape their strategy. Without this depth, recommended portfolios struggle to achieve genuine alignment with investor needs.
2. A lack of any sort of hyper-personalization, including clear explanations of trade decisions and how they directly support customer goals. This absence of transparency undermines clients' sense of ownership and control. Ultimately, this trust deficit limits investors' willingness to entrust robo-advisors with their full portfolio of assets.
3. A failure to deliver true interaction. Simple chatbots cannot grasp the subtleties of investor anxieties, specific questions or evolving priorities – unlike more sophisticated genAI-powered solutions. This gap reinforces a “one-size-fits-all” perception, limiting long-term engagement and the opportunity to earn client loyalty.
4. An inability to support householding, as existing platforms have limited capability to view a full household's financial picture. This results in disconnected advice and suboptimal recommendations across linked accounts all the more glaring at a time when 62% of consumers around the globe identified the ability of financial services firms to integrate other financial accounts or services into a single platform as an important digital offering.
5. The inability to support a single account funding multiple goals, as current strategies fail to address the varying risk profiles and timelines associated with life events like retirement, college savings, large purchases and legacy savings, leading to mismatched investments that hinder growth potential.

The failure to adapt and meet the expectations for personalized customer journeys contributes to the struggle of robo-advisory propositions. The future of wealth and investments for the mass market converges on responsible product offerings, delivering financial outcomes aligned with customer goals, ensuring an exceptional customer experience, and leveraging cutting-edge technology efficiently at scale. However, the initial iterations of robo-advisors have fallen short of delivering these promises.

The time is right for a comprehensive reboot in the robo-advisory sector. In part two of this series, we’ll explore the potential of genAI to create and deliver the personalization that is so clearly missing.