What Does A Looming Market Downturn Mean For Robo-Advisors – And Their Investors?

Digital wealth management advisors – more commonly referred to as robo-advisors – are gearing up to feel the full force of a bear market for the first time ever. A serious downturn is being projected in the global market, and robo-advisors expect to face a kind of test that they have barely experienced before. With little to no human involvement, these modern day wealth management platforms have been offering insights into investment options for about a decade now. They have almost exclusively operated in an environment of consistent growth, but are now set to come to a head with an impending downturn in sight. So what is the implication of this for them and even more importantly, for their customers?

Low risk, solid return

For people who have invested using robo-advisors, the advantages are fairly straightforward. The significant removal of human interference provides more solid and logical investment options. The insight offered is fully backed up by data, with the emotional “go-with-your-gut” element completely tossed out of the window.

This essentially means that an investor’s money will be automatically allocated to low-risk channels according to the information they offer. It also eliminates the possibility of panic sales. Another huge selling point for robo-advisors to date has been the very low or no-minimum requirement to run an account. All of these elements have of course made the platforms very popular with a more-millennial generation of investors.

A bear market

Every so often, the market hits the reset button and for a period of time (generally estimated to last a little over one year), optimism and confidence in stocks is replaced by pessimism and sales driven by fear.  The digital wealth management services are preparing to cushion against such a plunge by introducing features and tools that will help reduce the risk for their investors. This is also a first experience for many of the young customers, who might have to start following news cycles more actively to keep apprised of trends.

More seasoned investors will probably share the wisdom of the old trading adage, “Bulls make money, bears make money, pigs get slaughtered.” It simply preaches calm and objectivity in the midst of extreme highs and lows. Robo-advisors and their digital base might be relatively new to the game, but the old rules still apply. Temperance is the most valuable asset in an upturn, and the same is true for audacity in a downturn.