While a low percentage of plan sponsors provide participants with access to a robo-advisor, a new report finds growing robo usage by pre-retirees and younger generations, as well as more balanced portfolios for those with less than $100,000 in assets.
In “Robo Usage, Awareness and Trial: Market & Competitive Data to Inspire Innovation, Improve Portfolios and Increase Conversion,” Hearts & Wallets reports that U.S. households who have some money in robos increased to nearly 12 million in 2020, up from 10 million households in 2019.
Hearts & Wallets defines robo-advisors as investment solutions, specifically “automated portfolios that use technology to build, monitor and automatically rebalance investments, and often offer access to an investment professional.”
According to the research, robo ownership was found to be most common among households with $50,000 to $500,000 and younger generations. Nearly 7 in 10 Millennial millionaires have some money in robos or automated portfolios. Moreover, nearly 20% of Millennial and Gen Z households who know the investment products they own have some money in robos versus only 13% of Gen X and only 2% of Boomer+ households (Boomers and older).
For the retirement industry, pre-retirees also report high usage of robos with 16% saying they have some money in robos, almost as high as the 18% use reported by the youngest age cohort (those aged 21 to 27 years old). As such, the report suggests that providers should consider developing robos for later life stages, noting that these consumers will need income features in investment selection, and broader and deeper capabilities in planning.
“Robos tailored to fit the needs of pre-retirees could fill an important niche within the marketplace,” says John Towle, Chief Client Officer at Hearts & Wallet. “Advice could include tax optimization across account registrations and other later life considerations.”
The study also found that most households with money in robos allocate between 10-15% of their portfolio to robos, resulting in a wide range of account sizes with many wealthy households investing more than $250,000, while households with fewer assets might invest only $500.
Managed Products and Allocations
Robo owners tend to be heavier users of managed products than non-owners, with 47% of robo-owner portfolios allocated to managed products versus 25% for non-owner portfolios.
Hearts & Wallets also found that robo owners allocate more of their portfolios to ETFs than non-owners (8% versus 2%). And since most robos are composed of ETFs, robo owners have 20% of their portfolios in ETFs versus only 2% for non-owners, the study notes. At the national level, robos may be displacing mutual funds. Here, the analysis shows that robo-owners have 10% allocated to mutual funds versus 15% for non-owners.
Robo ownership is associated with more moderate equity allocations across their entire portfolios versus non-owners who exhibit extremes of low or high allocations. According to the report, robo owners with less than $100,000 in assets own more investment product types than non-owners; they also were found to have more balanced portfolios among consumers with less than $100,000.
“Robos can engage lower-asset households in better portfolio behavior,” says Laura Varas, CEO and founder of Hearts & Wallets. “The first step for all consumers to know which investment products they own. For those who do, the robo-investment product appears to have a positive impact on making portfolios more diversified than mutual funds and more accessible than managed products.”
The firm also conducted an analysis of 18 robos and fintech offerings by comparing awareness and trial of new entrants with new offerings from established firms. It has tracked new entrants since 2015, and in 2020 added coverage of new offerings of established firms.
It found that the top 10 firms overall in national awareness in 2020 include more new offerings from established firms than new entrants. The study also found that while new offerings from established firms have higher awareness among older and wealthier consumers, new entrants are winning in awareness among younger consumers.
Vanguard Personal Advisor Services was found to be the best-known new offering among households with $1 million+ in assets, while Robinhood was the best-known new entrant overall, and the only new entrant to increase awareness significantly from 2019 to 2020.
The research draws upon the Hearts & Wallets Investor Quantitative Database, which includes over 100 million data points on consumer buying patterns from 60,000 U.S. households. The latest survey wave was fielded in August 2020 among 5,920 participants.