4 Reasons Why Millennials Are Crazy About Robo-Advisors

Wahed Editors

 

It’s about time people started using advanced technology to manage their investments

In the past few years, we’ve seen breakthrough innovations such as autonomous trucks, packages delivered by drones, and wireless phone charging. We’ve also finally started to see similar changes and advancements in the financial industry.

Robo-advisors, or automated financial advisors, have grown significantly in the past two years. Bloomberg reports that robo-advisors’ (or RA’s) assets under management will grow from $50B in 2017 to $2T just in the U.S. by 2020. That’s more than Russia’s GDP!

A significant driver of that asset growth under management has been millennials. The demographic loosely defined as those born in the 1980s to mid-1990s has seen technology shape nearly every aspect of their lives. In that sense, they’ve become the de facto early-adopter generation with new technologies.

While this interest in new technology may have driven many millennials to experiment with robo-advisors, their approach to finance has also been a perfect match with the features that robo-advisors provide.

Let’s break this down to understand the main reasons behind the breakthrough for robo-advisors and the growing interest in using them among clients.

 

1.Low Fees

Traditional financial advisors typically charge 1.5% of your assets annually, and that can be higher in some cases. For a young investor growing their portfolio over a long period, this can end up being a very substantial expense year-over-year.

Besides, as millennial investors get started early with long-term investment planning, every dollar counts, they don’t have the money in their bank accounts to pay hefty fees. That’s one reason why Wells Fargo believes only 16% of millennials work with a financial advisor.

Robo advisor’s, on the other hand, can be much more efficient. They have passed a chunk of this cost saving to the end user. Fees are usually less than 1% and can go as low as 0.25% for larger accounts.

 

 2. Low Minimum Investment

Advanced technology is allowing robo-advisors to offer account minimums as low as $100. As we mentioned above, millennials are cash conscious and don’t have a lot in their bank account to start investing with – so that’s music to many of their ears. RA’s can offer sophisticated investment services with low minimum investments for a few reasons.

Firstly, since the back end processes are all automated, RA’s costs of handling a client with an account balance of $100,000 are the same as handling one with a $100 balance.

Secondly, some RA’s have the ability to buy fractional shares from brokers. Some large brokers provide this service due to their technology and the volume that they handle (your daily dose of financial jargon, that’s as technical as this post gets). However, this wasn’t always available to investors of all sizes. While we’d all like to have $100,000 in savings, we don’t. RA’s know that, and they’re here to cater for the other 99%.

 

3. Liquidity

Millennials can be commitment-phobes. Far from buying homes, this generation is not even renting. The percentage of this demographic – aged around 18 to 35 – who end up living with their parents has been increasing steadily since the Great Recession, peaking at about 36% last year.

They may also be taking this fear of commitment to their investment thesis as well. A Bloomberg survey of millennials found that they only wanted to lock up their money with a max one-year investment commitment.

Luckily for this generation, robo-advisors generally invest in highly liquid and low-cost funds. These funds are typically traded millions of times a day. Clients can, therefore, request to fund or withdraw money from their account at almost any time.

Funding can take as little as one day and making a withdrawal is processed in as little as four days. No lock-up period, no exit fees. Simple.

 

4. Convenience

Technology is continually reshaping the lives of millennials. Need a ride? Tap an iPhone to order. Need to deposit a check? Take a photo with your phone.

Robo-advisors provide a simplified wealth management service with generally low costs that meet expectations millennials have with technology to simplify their lives. They can get started relatively quickly. There’s no need to schedule calls and meetings during the day, no small talk, and no need to fill countless forms.

In most cases, all they need to do is answer a quick risk questionnaire, which enables the RA to recommend an optimal and diversified portfolio to suit the client’s risk profile. It’s broken down to make the process as efficient as possible. Most importantly, clients can view their positions at any time, in nearly real-time.

Wahed is Changing the Game in Halal Investing, While it’s easy to group all millennials into one basket, we also need to consider that we can’t typecast millennials as all having the same needs, wants and desires. Muslim millennials, for instance, have certain needs to be met to ensure their investments are Halal.

With Wahed, they can start at just $100 and get access to a variety of investments, including Sukuks or Islamic Bonds. We automatically rebalance portfolios so you don’t have to worry about managing your investments. Furthermore, clients can have peace of mind knowing that their money is being invested ethically as our Ethical Review Board monitors all investments to ensure they are Halal.

Finally, millennials will also be investing in socially responsible companies, whose missions include improving our communities!

Are you looking to invest ethically as you enter your mid-to-late twenties or thirties? Start investing with Wahed today.

 

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