5 Reasons More and More Baby Boomers Use Robo-advisers
When you think of a good portfolio manager, what comes to mind? Straightforward? Without emotion? Able to fit in the palm of your hand?
Well, more and more Baby Boomers are seeing it this way. They’re beginning to use robo-advisers in large numbers. The following explains why.
Boomers Are Becoming Digitally Savvy
When it comes to cutting-edge technology, Millennials have company. Baby Boomers are quickly catching up and taking advantage of what digital assets have to offer. Just one example of this is how Baby Boomers have taken to robo-advisers.
As Richard Eisenberg, the Senior Web Editor of the Money and Security channels at Next Avenue recently pointed out:“And the trend is heading in this direction. A Hearts & Wallets survey discovered that, among people 53 to 64, usage of digital resources jumped 8 percentage points from a year ago; 50 percent of this group uses them. And 30 percent of retirees surveyed do.”
We’ll discuss the benefits of using robo-advisers in the following sections, but it’s important to understand how modern technology is connecting Baby Boomers with these attractive advantages. As with many things, Millennials used robo-advisers first, but Baby Boomers are quickly making up for lost time.
Boomers Need to Protect Their Retirement Nest Eggs
This should go without saying. If something happens to a Baby Boomer’s nest egg, there go their plans for retirement. Depending on the damage done, they may never get to retire. At the very least, they’ll most likely need to dramatically reduce their expectations for this important time in their lives.
Perhaps the most attractive quality about robo-advisors to Baby Boomers is the ability to basically “set it and forget it.” Your nest egg is not something you want to tamper with on a regular basis. This is how accidents happen.
That being said, routine tasks that are necessary for keeping your nest egg healthy can simply be automated. This means no errors made and no foregoing these important, wealth-improving tasks.
Boomers Need Reliable Income on Retirement
One of the many reasons I recommend the asset dedication approach is because it gives people a reoccurring source of income during their retirement years. This approach differs from others because it’s based on dedicated portfolio theory, which is used to produce matching cash outflows.
After a retiree picks their goals, asset dedication approach allocates specific assets to accomplishing them. The investor’s portfolio is divided into three asset categories:
Using individual bonds in a dedicated portfolio is especially powerful and perfect for producing predictable returns that are immune from the types of systematic risks generally associated with investing.
As only money put into individual bonds will produce the kinds of predictable returns we want, the fixed income allocation should match the person’s goals for a specific time horizon.
This could be a specific annual cash outflow or funds required to be withdrawn in bulk at a certain date.
In any case, price fluctuation during the investor’s holding period is inconsequential because a bond returns its face value at maturity. As such, an investor can avoid any losses by holding quality bonds until they mature and pay out.
Many robo-advisers make it very easy to set up this powerful approach and then automate it. Baby Boomers get the reliable form of income they need in retirement without the headaches of having to put in constant work or monitor a human advisor trying to do the same.
Boomers Can’t Afford Any Mistake Made by Traditional Investment Advisors
One thing I brought up when I talked about what investment advisors will never admit is that these professionals are only human. You already knew that, of course, but the vast majority of people don’t seem to appreciate what kind of risk this entails.
Portfolio managers suffer from the same emotions the rest of us do. They can get scared just as easily as they can get overconfident. The difference is that, when they do so, the decisions they make can hurt someone’s plans for retirement.
Furthermore, even if they have 100% control over their emotions, that still doesn’t make them clairvoyant. That also doesn’t immunize them to the pressures of their job, the demands of their bosses and their genuine desire to keep you happy (and keep you as a client).
All of these very human issues help explain why Baby Boomers love robo advisors. While there will always be a place for people to contribute their expertise to the conversation, technology has made it unnecessary to risk your nest egg on the flaws that are part of being a person.
Boomers Need Financial Services with Low Fees
If all robo-advisers did was replace their human counterparts without charging as much, it would be worth it for Baby Boomers. However, as we’ve described in detail, robo-advisers actually provide certain benefits that a traditional portfolio manager just can’t.
Better still: they cost a lot less.
Arielle O’Shea brought this up in her piece, “Baby Boomers Could Take Millennials’ Lead on Investing”:
“But the key service that robo-advisors provide — very low-cost portfolio management — is valuable at any age, and reducing fees can make a significant difference in the things that matter most as retirement approaches: how much was saved and how long that money lasts.”
Later, she gets specific:
“Many robo-advisors build, manage and rebalance portfolios for less than 0.50% of the client’s assets, including the expense ratios of the investments used, typically low-cost exchange-traded funds. That’s about half the cost of the typical financial advisor’s management fee, which is charged on top of investment expenses.”
Keep in mind, too, that you can shop around to get the perfect robo-adviser for your purposes and still pay almost nothing.
Current Robo-Adviser Options
To prove this last point, let’s look at some current robo-adviser platforms out there right now:
- Vanguard Personal Advisor Services
IncomeClub also has its own robo-adviser, as well. It’s currently the only automated option on the market that is entirely dedicated to bond investing. Fees are just 0.25% for this service.
Given how many other industries have leveraged technology to such large degrees, it was only a matter of time until the same thing happened to investing. Robo-advisers provide more benefits with far fewer risks, which helps explain why Baby Boomers are quickly putting them to use for their retirement goals.