The coronavirus and its associated pandemic have sent the whole world into a frenzy. It is affecting global economies, stock markets, small and large businesses, and the entire human race negatively. However, it is essential to note that during the pandemic, the robo-advisory industry has experienced a massive surge. While the coronavirus pandemic has closed down many borders, slowed down economies, and beaten down the global markets, it has allowed the robo-advisory industry to prove its worth among the tumultuous times.
The signups for robo-advisory services have surged like never before. The account numbers soared to an all-time high in the first quarter of 2020, with an average rise of 3.1% across all providers and platforms. Individually, Vanguard reported a 14% growth in assets and 35% surge in customer numbers while PensionBee also saw an increase of 14%. AJ Bell Youinvest and Hargreaves Lansdown were not far behind with growth in assets of 13% and 7.4%, respectively.
The reasons for the surge can be many; however, analysts speculate that the sudden rise can be due to the large number of millennials taking advantage of the buying opportunity in the bear market. Such investors have a longer time horizon and have a higher tolerance for economic damage. Amidst the crashing equity markets, the do-it-yourself investors are relying more on the advice of the automated robots than their shaken knowledge and experience.
Benefits of Robo Advisors During the Pandemic
The digital advice or robo-advisory platforms collect financial information from their clients online, analyse the data, offer advice, and invest automatically. They offer several advantages over the traditional modes of investment and advisory.
- Unaffected by emotions: The most significant benefit of robo advisors is that they are unfazed by emotions. The decisions made by robo-advisory platforms are based on real-time statistics and not short-term occurrences, black swan events, or any biases. Furthermore, the digital advice platforms put together the portfolio of investors based on their investment horizon, risk tolerance, financial goals, and balance sheet. Thus, the impact of illogical behaviour, poor decision making, and spontaneous buy or sell decisions is eliminated, which is critical during the current times of uncertainty.
- Invest in variable risk profiles and stable companies: Another benefit is that most of the robo-advisory platforms offer products catering to varying risk levels. The investments created in high, medium or low-risk products all depend on the risk appetite of the investors. Also, most of the digital advice platforms invest in blue-chip companies like Apple, GlaxoSmithKline, and HSBC, that are not heavily impacted by the current pandemic.
- Long-term investment horizon: A noteworthy benefit of robo-advisory during the pandemic is its long-term horizon. Most of the investments made through the digital advisory platforms are for a long duration. It is important to consider that the pandemic has caused temporary downturns in the economy; however, the long-term horizon remains secured. The long-term investments made through robo-advisory platforms will again gain momentum after the pandemic is over. The unnerving news is that the Dow Jones dropped 6.7% in ten days during the pandemic, the S&P 500 lost 8.1%, crude oil hit the negative numbers for the first time in history, and the Nasdaq fell by 12.3%. However, the long-term view offers a ray of hope wherein the Dow Jones remains at a gain of 181% over the last ten years.
- Re-evaluations: It is necessary to know that the evaluations done by the robo-advisory platforms are not permanent. The portfolios are reevaluated and rebalanced with the changing economic and market conditions. The effect of volatility on the investments is mitigated through tactical interventions by the digital portfolio managers who add the human touch to robo-advisory. Thus, robo-advisory is not completely devoid of a holistic approach and does not entirely depend on numbers.
- Low Fees: The robo-advisory platforms are also beneficial during the pandemic because of their low-cost fees, usually from 0.25% per year, compared to the conventional stockbrokers and other alternatives. During the times of financial instability and uncertainty, investors prefer to pay low fees and require low opening balances.
According to reports, the robo-advisors with unique strategies, holdings, and asset allocations performed well during the first quarter of 2020. The traditional portfolios suffered a setback and reported negative returns in the same period. For instance, for March 2020, robo Titan Invest generated a positive return of 8.02%, while the S&P 500 was at a negative 13.79% for the same duration.
Thus, the robo-advisory portfolios with more high-quality corporate bonds and Treasury bonds performed better than those holding high-yield and emerging market bonds, and so did the portfolios with a neutral growth/value spectrum. During the pandemic, the robo-advisory portfolios hedged with a short position in the overall equity market performed better, besides the portfolios holding all individual equities that benefitted from tactical trades into the ETFs, shorting the S&P 500.
The portfolios that performed better than others also included socially responsible investing portfolios and the ones with a higher allocation to domestic equities by using total stock market ETFs that favour large-cap technology stocks and other high-flying stocks.
Research and reports show that despite the crashing markets, investors’ appetite remains high. The trading activity remains vigorous across the DIY investment platforms and robo-advisory platforms, and the numbers are expected to grow further into the second quarter of 2020. The robo-advisory industry will hit $1.4 trillion in assets under management in 2020, reporting a 47% gain year-over-year. Financial analysts expect the number to jump to $2.5 trillion by 2023.
The industry has historically gained during any financial crisis and should do the same during the current pandemic and economic crisis. In terms of the number of users, the robo-advisory industry has 70.5 million users, equivalent to the 3.1% gain in the first quarter of 2020, majorly owing to the pandemic. Analysts expect the number of users to grow to 123.5 million by 2022 and 147 million by 2023.The current coronavirus pandemic has demonstrated that the robo-advisory industry is also not immune to market volatility. However, the surge in signups, asset under management, and the number of customers indicate the industry will continue to evolve as the future belongs to digital. The market adversity has taught many robo-advisory platforms to learn from their mistakes and apply the lessons in their future. This will only lead to more balanced millennials and more mature and stable robo-advisory platforms in the future.