ESG Investing

Do Robo-Advisors Have a Place in Impact Investing?


A passive investing philosophy posits that investors should not attempt to “beat the market” by allocating portfolios based on research or expertise. Robo-advising takes that ideology a step further and all but removes human managers from the investing process. As robo-advising has grown in popularity, a debate has emerged over its compatibility with impact investing.

What Are Robo-Advisors?

Robo-advisors are services that use artificial intelligence to manage a client’s portfolio. When enrolling, clients provide information about their age, income, and investment goals, including their target retirement date. The robo-advisor then plugs that information into an algorithm to generate a diversified portfolio in alignment with the client’s risk preferences. Over time, the robo-advisor rebalances the portfolio at set intervals or makes other automated adjustments in response to client requests.

Robo-advising differs from conventional portfolio management in that it makes investing decisions based on rules and preprogrammed formulas, rather than through the analysis or judgment of a human advisor. This makes robo-advising less flexible than conventional management—it is unable to improvise or deviate from its programming. But robo-advising is cheaper than other options because so little human labor is involved in its implementation.

Robo-advising is a relative newcomer to the investment landscape. The first retail robo-advising services were launched by Wealthfront and Betterment in 2010. Dozens of other robo-advisors followed, and by 2016, $126 billion in assets were overseen by robo-advisors. Because robo-advising has not been around long enough for extended study, its advantages and drawbacks are not fully understood. Still, some pros and cons for impact investors may be apparent.

What Benefits Does Robo-Advising Offer?

One appeal of robo-advising is that it lowers costs and barriers to entry for new investors. Robo-advising fees can be 0% for small portfolios, and minimum investments can be as low as $500—or even $0. This means that when robo-advising services offer socially responsible investments, they open the field to investors who are interested but may not otherwise have the resources to enter it. Robo-advisors are also easy to interact with through apps, and investors can set up an account without scheduling any meetings. And there is a perception that robo-advisors avoid conflicts of interest and other biases that sway human advisors.

These factors may make robo-advising more appealing to millennials, who according to some surveys are more concerned about investments’ social effects than members of older generations and who prefer to manage their money online rather than through in-person interactions.

Impact investing robo-advisors offer a streamlined vision that is understandable to new clients. For example, EarthFolio applies a number of environmental, social, and governance (ESG) screens across dimensions such as environment, animal rights, and fair labor and summarizes them in a simple chart. Similarly, Ellevest offers gender-lens investing based on key criteria such as women in leadership. Thus, robo-advising services allow clients to begin investing according to their values without first needing to parse the complexities of ESG metrics or evaluate all possible impact investing options. Robo-advisors’ concise summaries of their impact approaches spreads interest in impact investing among new investors who have not conducted their own research but are open to a short pitch from their investing app.

When robo-advising services offer socially responsible investments, they open the field to investors who are interested but may not otherwise have the resources to enter it.

Does Robo-Advising Conflict with Impact Investing?

While robo-advisors may introduce impact investing to a wider audience, how effectively they implement impact strategies is a different question. By design, robo-advising services apply general rules to make decisions for every client, using only a handful of custom data points. They are not able to get to know a client on a personal level and learn their investing goals in depth. Robo-advisors do not perform sophisticated analyses of impact, and they cannot incorporate nonfinancial considerations into their decisions in nuanced ways. Their “set it and forget it” approach may discourage eligible investors from participating in shareholder engagement opportunities.

For these reasons, impact investors who can afford personalized advice may eschew automated services. That said, it is possible to find a balance in which committed investors pay for human advisors’ expertise and hands-on support in crafting socially responsible portfolios, while new investors try impact investing through more accessible robo-advising apps.

Services that combine automated tasks with personal control may be suitable for those who want to harness low-cost digital tools as they pursue impact. One example is Motif, which allows investors to choose from thematic impact portfolios or to build their own and share it with other investors. Another is OpenInvest, which offers clients the ability to choose from several impact areas, divest from any companies they do not wish to support, and participate in proxy voting through its platform.

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