What’s going to happen to the robo-advisors the next time the market crashes?

I have come across this question few times. Below is my response.

The next time the market crashes, people who would have previously burnt their hands while investing in individual stocks or in not-so-highly-diversified portfolios, will migrate to a highly-diversified portfolio managed by a low-cost automated investment service.

Typically, people assume that they know more about the markets than others. People assume that they can time the market.

But the reality is that the best approach is a highly diversified portfolio that consists of low-cost investments. So, after a market downturn, this truth will dawn on more people, especially those who would have burnt their hands playing the markets with their bravado or ignorance.

That said, there is no denying that automated investment services will face the risk of redemptions during a downturn. However, this is a risk faced by any wealth management service (except those who market themselves to make money even when the markets go down!). So, there is a possibility of decrease in the revenue of an automated investment service during a downturn, more so when the downturn is prolonged over multiple years. In such situations, only the best of the automated investment services will move forward, while few others might throw up their hands, as they run out of money to fuel their operations. There can be a consolidation in the industry at that time (who knows!). May be. However, the industry itself will move ahead to innovate more towards a superlative online product/service to the clients.

So, a major market downturn might pave the way for further validation of the service among the people.

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