Most Young Investors Lack Understanding of Robo-Adviser Technology

Young investors are receptive to automated digital advice and portfolio management from their brokerage firms but lack understanding of how the technology works to create and manage their portfolio, according to J.D. Power.

Millennials and Generation Z investors are generally open to using robo-advisers to select and manage their investments based on personal preferences. Among Millennial investors, 79% expressed interest in robo-advice, up three percentage points in the past three years. Meanwhile, even more Gen Z investors indicated interest at 86%, up five percentage points in the last three years.

Although there is clear interest in robo-advice offerings, J.D. Power reports that most users do not understand how the technology works. Less than one-quarter of investors (22%) who use robo-advice offerings from their brokerage firm said they “completely understand” how the technology creates and manages their portfolio.

“Digital, or robo-advice, presents an ideal platform to provide value-added services that can help grow and develop higher value relationships over time,” said Craig Martin, executive managing director at J.D. Power, in a statement. “But firms need to do a better job explaining how that digital advice works and articulating a clear value proposition for investors.”

According to J.D. Power, human support remains key. Self-directed investors continue to rely on human help for processes such as onboarding or answering technical questions. In addition, the firm reports that human support promotes transparency and trust in digital advice. Nathan Voris, head of channel strategy at Morningstar Investment Management LLC, agrees that digital advice should be paired with in-person support.

“From our experience, when we think about programs delivering advice, the ones that are most successful typically have a multichannel approach,” says Voris. “You have the ability to have that in-person, in-real-life conversation, but you also have a high-quality digital, and even a high-quality print channel. From our experience, the participant often moves from one to the other, and that can often happen in the span of a few minutes. Having a program that has that multi-channel approach gives the user the choice on how they want to engage, which we think is the best practice.”

He says that while there are plenty of investors who are comfortable in a digital-only environment, these individuals can often change their decision in an instant.

“If a person is second-guessing themselves, if they’ve had a life event, if the economy has taken a turn, all of those things might trigger that need for a gut check and really the desire to talk to another human being, to walk them through their concerns, to make sure they’re on track and to provide some guidance. We think that an individual adviser really plays a key role in a successful program,” says Voris.

Among investors seeking guidance, Fidelity (704) tops self-directed investor satisfaction. E*Trade (698) ranks second, followed by Charles Schwab (695).

Vanguard (734) is first in self-directed investor satisfaction among do-it-yourself investors. T. Rowe Price (724) ranks second, and Charles Schwab (717) places third.

Conducted from October 2022 through January 2023, the U.S. Self-Directed Investor Satisfaction Study from J.D. Power drew responses from 5,165 investors. These individuals do not have the counsel of a full-service financial adviser to guide their investment decisions.