As automated investment platforms, or robo-advisors, proliferated over the past few years, many critics panned their lack of the human touch. When inevitable market corrections come along, asked the critics, how would nervous clients react when they had nobody to call to talk them off the ledge?
Many robo skeptics predicted that jittery investors would let their emotions get the best of them. Robos’ clients would panic, abandon their long-term investment strategies, and press the ‘sell’ button at ill-advised and inopportune times.
But thanks to the long-running bull market and the continued strong performance of the U.S. stock market, these discussions remained in the realm of conjecture.
Then the last few trading days happened.
Slowing growth in China and disappointing corporate earnings in the U.S. spooked traders and triggered a major sell-off. The S&P 500 was down 2.1% last Thursday (Aug. 20th), 2.05% on Friday, and a scary 3.9% on Monday. The Dow dropped more than 1,000 points in early trading on Monday before clawing back to close just shy of 600 points down – a one-day drop of 3.6%.
Combined with the downward trends of late-July and earlier in August, this put the market squarely in correction territory. Despite mixed signals from the market midweek, many advisors expect more losses ahead according to InvestmentNews.
With saturation media coverage, even casual observers are aware of this market volatility. How will the robo-advisors’ millennial clients – some of whom are too young to have experienced the crash of ’07-’08 – react? What about Gen-Xers who have now lived through a few market swoons, and for whom retirement is gradually getting closer?
Will the email messages, blog posts and tweets issued by robo-advisors be enough to calm their nervous investors? Without the behavioral coaching that human advisors provide in these times of crisis, will robo-advisor clients have the fortitude they need to stay the course with their long-term investment strategies? Or will they lose their nerve and simply click the ‘Sell’ button? If they do that, and degrade their investments’ performance and shrink their portfolios, will they get mad enough to initiate withdrawals? If so, where will they move their money?
If none of these things happen, and the predicted knee-jerk reactions in the absence of the human advisor’s voice don’t materialize, what will that mean for the future of the advice market?
Nobody knows yet, but whatever happens, these developments will be fascinating to watch.
