Everything is going digital! Even the way in the way in which we manage our investments. Investing is a job that used to require a broker at a brick-and-mortar stock exchange before first moving online about two decades ago. But we are now seeing an entirely new revolution in the field of investment management – robo advisors.
Here’s the deal:
Robo advisors are digital financial advisers that operate with minimal human interference. Today, we’re going to look into how robo advisors operate and check out the latest robo advisor statistics and future outlooks on the market.
Let’s crack on.
Fascinating Robo Advisor Statistics (Editor’s Choice)
- In 2019, the robot advisor market hit $827 billion AUM.
- The total robo adviser market size in 2020 is $987 billion.
- Estimates suggest the market to finally break through the magic $1 trillion mark for a total amount of AUM of $1.367 trillion in 2021.
- Studies are predicting a rising growth rate compared to the previous year of 38.5% from 2020-2021
- The growth rate is expected to be 21.4% for 2022-2023 and 17.7% for 2023-2024 for a total amount of AUM of $2.113 trillion, and $2.487 trillion.
Growth of Robo Advisors
1. When robo advisors first launched in the wake of the 2008 financial crisis, they were heralded as a revolution.
After Jon Stein launched Betterment in 2009, the modern robot advisor first gained popularity among the masses of financial investors, and the history of robo advisors began. Even though this type of financial technology had been around since the early 2000s, it had never been made available to the public as a B2C product before.
2. The premise of the robo advisor is to provide a risk-oriented investment strategy to a wide mass of people much more reliably and cheaply than humans.
And this much is true:
Robo advisors are much more adept at reading data, recognizing trends, and forecasting than any human could ever be. They make decisions not based on emotion or gut feeling but pure, analytical data processing.
Of course, this is not necessarily always a good thing. But especially when it comes to staking out worthwhile long-term investment portfolios, risk assessment is at the top of the list of things that make for a successful strategy.
3. Robo advisors gained popularity after the 2008 financial crisis due to their low-risk, long-term investment scheme.
(Business Insider, Deloitte)
Robo advisors invest exactly based on that:
Risk preference and desired target return. Which is exactly why they rapidly gained in popularity after the 2008 financial crisis, when people were simply trying to make their robo advisors assets under management last and not go bankrupt. Their general preference for low-risk, long-term investments leads many robo advisors to direct funds towards ETF portfolios.
The thing is:
The markets have changed since then, though. People are not exclusively looking for safe, long-term investments anymore. Especially in the bullish period markets all over the world were experiencing leading up to 2020, investors were willing to take higher risks for potentially much higher returns. This is something very few robo advisors are trained to do.
So, how has the market behaved during that time?
Has it been able to live up to the high expectations the financial industry attached to it when it first became widely available?
To answer these questions, we are going to dive into some more robo advisor statistics and compare forecast development with the actual market growth.
From the very beginning, experts and analysts alike agreed that this type of fintech would find rapid global adaption. Yet, we cannot help but notice the discrepancies between the forecasts and actual performance of the robo adviser market.
Back to the stats:
4. $95 million was raised in investment capital within two weeks in 2014.
In the first couple of years, robo advisers naturally gained popularity, as the external circumstances were ideal for their rise. People were looking to invest smaller sums of money into safe, long-term oriented portfolios.
Unfortunately, very few statistics are available for the early years of the technology. However, the first major developments happened in 2014, when Wealthfront, Betterment, & LearnVest all raised $95 million in investment capital within two weeks after accumulating $500 million in assets under management (AUM) each.
5. Companies Wealthfron and Betterment passed the $1 billion AUM mark by the end of 2014.
From there, Wealthfront and Betterment in particular started to make a name for themselves as developing companies with robo advisors. Both very soon passed the $1 billion AUM mark before 2014 ended.
6. In 2015, the company Vanguard dominated other top robo advisors with multi-billion growth in AUM in several months.
The long-established venture capital firm Vanguard started its own robo advisor program in 2015. It quickly became the market’s dominating player, several billion dollars to its AUM in just a few months. This led to Wealthfront and Betterment having to report massive dents in their growth numbers, significantly slowing down in mid-2015.
7. The robo advisor market in 2015 hit $55 billion AUM.
By the end of 2015, robo advisors had an impressive $55 billion assets under management. The four major players in the industry dominated robo advisor market share – Vanguard Robo Advisor AUM of $31 billion, Schwab Intelligent Portfolios AUM of $5.3 billion, Betterment AUM of $3.2 billion, and Wealthfront AUM of $2.6 billion.
8. In August 2016, Deloitte estimated that between $2.2 trillion and $3.7 trillion in assets would be managed with the support of robo advisory services in 2020.
This significant amount of AUM caught some attention, and robo advisors experienced a second wave of popularity, kickstarted by the entry of Vanguard into the market.
The robo report estimated that the figure would skyrocket to a mind-boggling $16 trillion by 2025.
9. Robo advisor performance for 2017 saw a total of $297 billion in AUM, a massive 540% growth from just two years back, robo advisor statistics confirm.
After that, though, the entire industry growth slowed down. While the industry only saw a 74.5% growth in assets to a total of $519 billion from 2017 to 2018, a troubling development for an industry with such lofty projections.
While these growth numbers are not bad in and of themselves, they are far from what analysts had speculated the industry would see from 2015 onwards. This led to a lot of worrying, both from companies and stakeholders.
Additionally, there was a growing level of competition.
A large part of these companies’ target audience, millennials with smaller investment accounts, were simply not at the age when they would want to invest.
10. Tiger Global Management invested $75 million in Wealthfront in January 2018.
Looking at a robo advisor comparison, companies started diversifying their products in attempts to capture new parts of the market, some straying quite far from their original philosophies that had gotten them to this point.
Wealthfront in particular ended up introducing policies that significantly raised fees for investors following a $75 million investment by Tiger Global Management, a business that can best be described as a hedge fund.
It was quite obvious that the new startups were scrambling to maintain their growth rates. In an attempt to persuade investors, they began experimenting with new approaches, shifting away from their focus on millennials with small investment accounts.
Faced with disappointing growth and a harsher market environment, the future of startups offering high-quality, low-cost robo investing is looking far from rosy at this point.
Robo Advisor Market Size 2020
11. In 2019, the robo advisor market hit $827 billion AUM.
The robo advisor market size hit a new high with $827 billion AUM in 2019. But a new high is not always reason to celebrate. From 2018 to 2019, the industry only registered a growth rate of 59.3%, far away from the continuous 150%-200% analysts were estimating to see not even three years ago and once again lower than the previous year.
12. While global stock markets experienced record-breaking numbers in 2019, robo advisors struggled to break even.
(CNBC, International Banker)
All of this happened with global stock markets registering record years all over the world in 2019. Yet, consumers were simply not willing to put their funds into the hands of robot investors. More and more studies show that customer acquisition costs in the industry are extremely high. So, even the largest robo advisors do not control significant funds to break even anytime soon.
And that’s not all:
Regulatory costs also heavily influence the market. Authorities in the two main markets for robo advisors, the Securities and Exchange Commission in the US and the Financial Conduct Authority in the UK, have made it more and more difficult for robo advisor companies to acquire new customers at profitable rates.
This has prompted even more companies to shift their attention away from the B2C segment towards a more B2B-focused approach.
13. Total robo adviser market size in 2020 is $987 billion.
But it was seemingly all in vain. From 2019 to 2020 the growth rate of the robo advisor industry was a mere 19.3%, amounting to a total robo adviser market size in 2020 of $987 billion, a far cry from the $2.2 to $3.7 trillion market size predicted in 2016.
14. In 2020, the COVID-19 pandemic caused worldwide markets to collapse, which had significant impact on the robo advisor industry, robo advisor stats reveal.
Of course, 2020 was not like any other year. The COVID-19 pandemic essentially immobilized the entire world and sent stock markets crashing to the ground. On March 20, the DOW fell more than 500 points for its worst week in 11 years. The barrel of crude oil hit a price of -$37.63 as an industry built almost entirely on future deals collapsed on itself.
It comes to no one’s surprise that the target audience of robo advisors did not feel like investing at this stage, leading to a massive downturn across the entire industry in early 2020. However, towards the end of the year, the market managed to pick itself up, striving amid a volatile environment.
The Future of Robo Advisors
Where the market goes from here remains to be seen. It all depends on how strong markets and inventors emerge after this corona pandemic, and how willing robo advisor companies are to listen to their customers and adapt to market demands.
15. Estimates suggest the market to finally break through the magic $1 trillion mark for a total amount of robo advisor AUM of $1.367 trillion in 2021.
Current forecasts for the robo advisor industry still paint a positive picture. Not as positive as they did not even four years ago, but certainly still a beacon of hope for the people involved.
With that in mind:
Studies are predicting a rising growth rate compared to the previous year of 38.5% from 2020-2021, likely under the assumption that markets will emerge strongly from the pandemic.
16. For 2021-2022, the growth rate is once again predicted to lower to 27.3% for total AUM robo advisor valuations of $1.741 trillion.
After that, the growth rate is expected to be 21.4% for 2022-2023 and 17.7% for 2023-2024 for a total amount of AUM of $2.113 trillion, and $2.487 trillion, respectively.
The ride of the robo advisor market has been a bumpy one. A strong start led analysts to completely overvalue the industry in 2016, attaching expectations to it that it could have never possibly lived up to.
Year after year, the growth rate kept dropping, and robo advisor companies kept reporting operating losses as they faced down growing customer acquisition costs, a more competitive market environment, and new regulations by authorities.
However, the market has been growing. Much slower than anticipated, but it is still going strong. Surprisingly enough, the Covid-19 pandemic of 2020 seems to be what was needed to put the industry back on the right track and give robo trading an unexpected boost.
Where robo advisors end up remains to be seen.
The fact is:
Despite the turbulent year, they are now in a good position to start strong. More and more millennials are reaching the age where they are looking to invest to boost their personal finances. So, the potential target market of the industry and robo advisor demographics are only just now opening up.
Robo advisors are the inevitable next step in the evolution of trading. And like augmented and virtual reality, they’re here to stay. So, we should see a strong market and positive robo advisor trends emerging from a tumultuous decade. Keep an eye on the robo advisors latest news.
Q: What is a robo advisor?
Here’s the robo advisor definition:
A robo advisor is a program that manages your investment portfolio. Essentially, it takes over the traditional role of the broker, managing your investments for you adjusted according to your risk preferences and desired target return. So, in the most basic terms, a robo advisor invests your money in the stock market for you.
Q: How do robo advisors work?
Like all software, a robo advisor begins its life as a basic algorithm that uses machine learning to understand how the stock market behaves. This algorithm is then fed tons of data and information from seasoned market analysts that allow it to learn everything there is to know about the stock market and how it behaves – one of the main benefits of robo advisors.
Based on all this information, a robo advisor assesses the risks and potential returns associated with every single possible investment and makes the choice most fitting to your investment strategy.
Q: How many robo advisors are there?
As of 2020, there are over 300 different robo advisers by more than 15 companies available worldwide, robo advisor statistics reveal. Most of them are in the US, which proudly represents over 200 of those virtual advisors.