Amid market turmoil, enter the robo-adviser

Running on autopilot and at lower cost, new service attracts growing number of investors

NEW YORK • Since the last major stock market plunge, back in 2008 and 2009, a new type of investment adviser has arrived on the scene.

The robo-advisers, as they are commonly known, hold a lot of promise: They can potentially save investors from themselves in volatile markets by providing access to professionally managed portfolios of low-cost investments.

They run on autopilot, cost just a fraction of traditional advisers' fees and are typically available to people with small amounts to invest.

But in most cases, investors would not be assigned to a warm-blooded professional who will be on call should markets plummet, as they have done for most of this year.

Instead, customers may receive a video message via e-mail from a well-seasoned adviser, imploring them not to panic, though they can also reach someone at the company via online chat or phone.

The robo-advisers have quickly attracted a growing number of investors. They have also caught the attention of established financial players. Digitally driven investment providers were estimated to hold US$53 billion (S$76 billion) at the end of last year, said the Aite Group.

That is up from US$2 billion in 2013, though at least half of the growth is from existing firms like Vanguard. And it is still a small fraction of the US$20 trillion in retail investors' total investable assets.

With few exceptions, these services share the same widely established investing philosophies: Create a low-cost diversified portfolio for the long run, never time the market and focus on meeting goals, be it for retirement or a down payment.

But the services can vary greatly in the overall approach. Some view an investor's financial life more holistically, taking into account money in, say, a workplace 401(k) retirement savings plan held elsewhere.

And while the actual investment recommendations should be relatively easy, the suggested portfolios differ widely enough to warrant closer inspection.

What really matters is whether investors are comfortable sticking with a particular recommendation when the markets sour.

There could be a significant difference in how much risk the robots believe an individual can afford to take, and what he can truly handle.

"Discipline matters more than allocation," said retired neurologist and investment adviser William Bernstein, who has written several books for do-it-yourself investors.

"Almost all advisers will tell you that what separates successful from unsuccessful investors is the ability to stay the course, irrespective of what that precise course is."


A version of this article appeared in the print edition of The Sunday Times on January 24, 2016, with the headline 'Amid market turmoil, enter the robo-adviser'. Print Edition | Subscribe