AI is making robo-advisors smarter. Is that a good thing?

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Financial advisors have long held the keys to strategic advice that helps investors manage their money. But AI-powered robo-advisors are changing the game.

In 2024, the global robo-adviser market reached $1.4 trillion in value, a figure that's projected to grow to $3.2 trillion by 2033, according to Market Research Intellect.

Key players in the market include Betterment, Ellevest, SoFi, Charles Schwab, Vanguard, and Wealthfront, offering investors automated investing solutions and advice at a fraction of the cost of a human adviser.

But as more Americans entrust their life savings to algorithms, financial planners are sounding the alarm about what might get lost when human judgment is taken out of the equation.

Kevin Estes, founder of Scaled Finance in Seattle, said AI might seem like a convenient shortcut, but it has a clear limitation.

“AI is very good at answering the questions that you ask; the challenge is that people may not know the right questions to ask,” Estes said.

AI-powered investing opens access — with limitations

Robo-advisors have democratized investing by slashing fees and eliminating account minimums that once locked out smaller investors. Where human advisors might charge 1% to 1.25% annually of assets under management (AUM), robo-advisors typically charge 0.25% to 0.50%, according to SoFi.

The appeal makes sense, especially to cost-conscious users. They can open accounts and start investing within minutes from their smartphones. Many platforms offer automatic tax-loss harvesting, which can help reduce tax liabilities without requiring investor involvement.

For tech-savvy investors, especially millennials, it’s a one-stop solution without the hassle of speaking to a human.

"I think it's wonderful that the barriers to investing have fallen so dramatically, that the cost of trading, that the access has improved, and that people are getting the ability to have solutions for their investing needs that don't cost nearly as much as they used to."

But the convenience and ease of using a robo-advising platform comes with complications. Ohan Kayikchyan, a certified financial planner, money coach and educator in North Carolina, is particularly worried about the lack of transparency surrounding robo-adviser algorithms.

"In many cases, they will not make their algorithms public," Kayikchyan said. "In many cases, it's like a black box; we don't know what is inside."

He noted that this obscurity makes it difficult for investors to understand why certain stocks in their portfolios are underperforming or when market conditions are shifting.

Unlike human advisors who can explain their reasoning and adjust strategies based on nuanced conversations, robo-advisors rely on standardized questionnaires that may oversimplify complex financial situations.

"The questionnaires that robo-advisors have are standard, so they are not necessarily catered for your situation,” Kayikchyan explained. Risk tolerance, for example, is where human intercession and communication are especially important.

"I'll try my best to explain with different examples and everything. But [with a robo-adviser], it is all on you …for you to read."

Your data’s digital footprint

As AI robo-advisors scale and manage billions of dollars more in assets, data privacy is another issue that financial advisors worry about. While robo-advisors must disclose data-sharing practices in user agreements, few investors read the fine print before agreeing to the terms, Estes said.

"Oftentimes, in the fine print, they'll say, ‘We share our information with our partners.’ But who are they and who all has access to this personal information, this private information?" Estes said.

With access to such sensitive financial and personal information — a field day for potential hackers and scammers — make sure you do your due diligence and fully understand where your account information might be going, he added.

The concern isn’t just about robo-adviser companies, but also their corporate parents and business partners. Many automated platforms operate under the umbrella of larger financial institutions, giving multiple divisions access to sensitive financial data for product cross-selling and marketing.

There are also unintended consequences when companies change hands, Kayikchyan said. He pointed to the bankruptcy and auction sale of 23andMe following a 2023 data breach that compromised nearly 7 million customers’ genetic data and ended with a $30 million lawsuit settlement.

In its bankruptcy proceedings, 23andMe’s genetic database of more than 15 million users was set for sale to a pharmaceutical company for $256 million, but the deal fell apart after a multistate lawsuit over data privacy concerns. After the auction reopened, a research firm created by one of 23andMe’s original co-founders won a $305 million bid for the company and its assets in July.

“The database is there, so the company itself didn't do anything wrong,” Kayikchyan said. “The information is private, but what if it gets purchased at a later time? This can happen to these robo-advisors as well."

Human advice that goes beyond your portfolio

While robo-advisors automate which stocks you should invest in, they have a narrow focus on investment management, which represents just one part of comprehensive financial planning.

"Financial planning is a lot more than investing," Estes said. "Investing is an important part of what I do, but it's kind of a small percentage of the total,” he added, noting that insurance, estate planning considerations ,and saving and budgeting for college expenses are all part of his tailored advice to clients.

"All of these things are elements that are just not going to be done by robo-advisors."

Human financial planners, on the other hand, can spot issues clients didn't know existed.

"One of the things that I really feel that my clients benefit from is me going through their statements and finding interesting things, observations,” Estes said, adding that he always asks clarifying questions before making recommendations — something algorithms can't replicate.

For example, a human adviser might notice concentrated stock positions from employer equity compensation — something a robo-adviser wouldn't see if those holdings sit in separate accounts, Estes noted.

Life changes such as marriage, divorce, children, job loss, or an inheritance require nimble financial adjustments that algorithms might struggle to accommodate. A human adviser can help clients navigate these transitions while managing the psychological aspects of investment decisions, like resisting the urge to panic-sell during big market downturns.

Which should you choose?

Robo-advisors aren't inherently bad, and they might serve specific populations well. New investors with limited assets, cost-sensitive savers, and tech-savvy professionals comfortable with self-directed investing can benefit from automated platforms, particularly for straightforward investment goals.

For those just starting their investment journey, robo-advisors offer an accessible on-ramp. But it’s important to know they have limitations and when to seek human expertise before an AI-powered decision made in the ether costs you more than the algorithm's modest fees could ever save.

But as your investment goals get more ambitious and you have more assets to manage, getting holistic human advice that goes beyond investment picks is worth considering, Estes said.

"I view AI solutions, to some extent, if they can do it well, as a compliment and not a threat to my business."