Why Do Millennials And Gen Z Prefer Robo-Advisors?
Gen Z and Millennials are embracing an unanticipated convenience with digitization in all facets of their routine lives. No wonder now that the investing preferences of this young populace are changing internationally. Before delving into the reasons why the younger generations might prefer robo-advisory, let’s just glance at the importance of a financial advisor in the first place:
- Maintaining discipline in planning for Budgeting, Retirement, Financial and Estate
- Maximizing returns while controlling investment risk
- Improving/changing the investment approach – an often overlooked facet that comes via conversations
- Optimizing tax consequences of investments
While the basics of planning for retirement might still apply, Gen Z investors like to do a lot of planning on their own. They are the generation that has grown up with smartphones. They anticipate that every interaction will be quick, easy, and transparent. Thanks to hyperinnovation in financial technology due to the latest financial crisis, wealth management firms are motivated to adapt to a substantially digital-savvy generation.
Countries all around the world are allocating money to develop technologies for digital inclusion. With the recent rise in the digital investor base and disposable incomes, it doesn’t seem far-fetched that financial management will become completely AI-based. As per Deloitte, RAs are expected to surpass the world’s largest asset management firm, Blackrock, in terms of assets under management (AUM) by 2025.
Robo-advisors align better with the Gen Z lifestyle
The circadian rhythm of Gen Y and Z is aligned more with functionality than the time of day. It is understood then that having 24-hour access to information is highly desirable to them. It helps them manage their schedules better and avoid missing out on essential tasks such as investments. Robo advisors (RAs) give them the flexibility to manage their investments as and when they have time. 63% of Americans are inclined to hire robos to manage their investments, as are 75% of surveyed Millennials (Gen Y), given that younger investors typically know more about and trust the latest technological developments.
- Gen Z instinctively opts for RAs, as it often doesn’t possess the knowledge to manage its investments actively, nor does it have the time to devote to interacting with human advisors.
- The mobile generation always opts for efficiency over face-to-face interactions. It is now well-published that texting or calls with screen sharing are preferred methods of communicating with Gen Z.
- RAs require low investment thresholds allowing no upfront commitment, allowing room for some dalliance and scope for recurring investment. Services like Betterment have completely removed the minimum balance requirement to satisfy their youngest customers.
- The low and transparent wealth management costs of automatic investment managers is a boon for the new breed of investors that entered the markets during the pandemic as they worry about beating inflation.
- On top of all other factors discussed above, the intuitive UI/UX of RAs provide exponential simplicity that is most suitable to the latest investor cohort.
Robo Advisors have been championed by Gen Z
The idea of “robo advisory” is still establishing itself in the investment community despite its over a decade-long existence. Banks all across the world are now attempting to leverage the hype of RAs, with Allied Market Research forecasting the industry’s value to multiply 10 times by 2027 from its 2019 levels.
There is evidence of young investors signing up for RAs as they look for quirkier ways to grow their wealth with the hope that robo-advisors will enable them to make informed investment decisions through customized offerings. The propensity to be proactively informed rather than clueless in front of the financial advisor is another attraction for RA adoption. The big banks are paying attention too. Early in 2022, a Swiss bank tried to acquire Wealthfront. It did so because it would have expanded its services to reach 130 million Millennial and Gen Z investors looking for tech-savvy approaches to satisfy their financial needs.
- Digital onboarding and account management, the very basics of the modern customer journey, are some of the reasons for the RA hype.
- The need of millennials for flexible, individualized investment options like goal-based investing (GBI) is pushing RAs into the mainstream as a tool to promote more focused decision-making.
- Through thematic investing, RAs also make it easy for 77% of the generation of ‘woke’ investors to diversify and channel their investments into causes they’re passionate about, like sustainable projects or ESG investing. The new generation of investors seeks digital-first solutions to make more meaningful investments by putting their growing incomes into safe and tested avenues.
- Robo advisory services have proven to be a friend to Gen Z because they make investing easier – especially in alternative asset classes. Gen Z has championed Crypto, the decentralized asset that has kept them away from human advisors. They like plug-and-play solutions to make the most of their time and investments, as they believe time is money.
Hybrid Robo advisory: A coming-of-age investment solution
Some robo-advisory providers have begun to offer more specialized services as the market has grown. These services include the ability to reduce tax obligations by selling funds that are losing money, a practice known as tax-loss harvesting, and access to human financial planners through plans that also offer automated capital services, aka hybrid robo-advisors.
- A hybrid robo advisor is a service that combines professionally managed accounts with access to financial planning or counselling – with the aid of a robo-advising service.
- Many hybrid RAs offer a layer of planning and advising services via phone or video sessions with professional financial advisors.
- These services come with lower fees and are less time-consuming than meeting in person with a traditional financial advisor because they involve phone calls and video conferences.
Understanding the usability of robo-advisors for different investor personas can assist financial service providers in creating more efficient and user-friendly platforms that boost consumers’ engagement with the technology.
Evidently, the level of technological know-how, perceived usability, and trust significantly influence the likelihood of a person choosing RAs as their wealth management experts. Given their growing wealth, a robo-advisor might be the most economical and convenient choice for the younger generation wanting to make the most of financial markets. There is an active debate in the industry to make these tools open-source so that more functionality can be easily added, making them much more personalized.