What’s wrong with how we’re investing for retirement, and can Robo-Advisers help us improve?

by Vincent Skiera
Posted on October 10, 2019

Retirement is something most people look forward to: no longer dealing with a demanding boss, no longer having to wake up at 6:30 in the morning, and no more working overtime. Life in retirement would be rosy…if it weren’t for the finances. Giving up work means no longer receiving income and instead relying on a pension, retirement savings, or both.

In recent years, pensions1 have become increasingly rare, and the amounts one can expect to receive are decreasing. In Germany, for example, the government pension level has steadily declined since the late 1970s, dropping from around 60% of the average income to 48.1% (Schmitz & Schäfer, 2018). The decline in government retirement payments and pensions has put increased emphasis on the need for individuals to save for their own retirement, e.g., through Defined Contribution plans, where employers contribute to employee’s pension plans through an annual payment but leave the investing up to the employee.

Saving for retirement is hard. It requires much foresight, meaning starting to save early, as well as making the right investment decisions. Unfortunately, very few people invest in the stock market at all, and those who do invest struggle to achieve returns on their investments—making saving for retirement seem like a Sisyphean task. Why is this the case? And what can be done to improve the situation?

Human investors make poor decisions

Figure 1: Distribution of average returns across asset classes from 1997 to 2017. Taken from (Morgan Stanley Wealth Management, 2018)
Figure 1: Distribution of average returns across asset classes from 1997 to 2017. Taken from (Morgan Stanley Wealth Management, 2017)

In Figure 1 you can see the annual returns of several asset classes over the years 1997-2017. It shows just how hard investing seems to be for the average investor: Average returns (2.11% per year) do not even match inflation. Notably, the average return of the S&P 500 Index over this period was 7.20%, suggesting that simply holding this index fund would have delivered much better returns than the average investor achieved.

Indeed, human behavior can make us bad investors. The average investor tends to trade too frequently, so that trading fees eat up the returns (Barber & Odean, 2000). Moreover, the average investor tends to cash in winnings while holding on to losses, in what is known as the disposition effect (Odean, 1998).

Most people fail to invest in the first place

Though poor investment decisions can keep investors from saving enough for retirement, those who don’t enter the market at all stand even less of a chance of succeeding. These people make up a very large portion of the population. In Germany, for example, only 16.2% of individuals own stocks (Deutsches Aktieninsitut, 2019). Comparing the average returns from Figure 1 for stocks and bonds, we can see that 10,000 Euro invested in bonds over a 40-year horizon would yield an extra 91,492.84 Euro in retirement savings2, highlighting the importance of investing in the market.

What can improve our investment behavior? Robo-Advisers as a potential solution

Financial advisers can provide investors with the confidence to enter the market, as well as assist in making good investment decisions—e.g. selecting the right balance of stocks and bonds. Sadly, financial advisers are expensive and often unattainable for the average investor. Yet new solutions are emerging.

Digitization has not only changed the way that we communicate but is also changing the financial landscape, with stock exchanges becoming fully electronic and FinTech changing financial services. One of the new services being offered is the Robo-Adviser: a fully algorithmic investment strategy that is personalized to each individual. The aim of Robo-Advisers is to make financial advice cheaper and attainable. Indeed, because they do not require human intervention to enable clients to enter the market and to make investment decisions, Robo-Advisers are cheaper than human financial advisers. Specifically, Robo-Advisers can cost as little as 0.39 p.a., as compared with 1% p.a. or more for traditional advisers. Moreover, whereas human advisers often require clients to make minimum investments of 50,000 Euros or more, the minimum amount required to engage with a Robo-Adviser is much lower, starting as low as 10 Euro (Finanztest, 2018).

Thus, the “great hope” invested in Robo-Advisers is that they will provide individuals who have no previous investment experience with a way of entering the market. As a result, the share of the population participating in financial markets may increase, thereby improving these individuals’ chances of saving enough for retirement.

Figure 2: This figure displays the fraction of bank customers in both the Non-Robo Adviser groups and the Robo-Adviser groups who did not have a portfolio in 2016
Figure 2: This figure displays the fraction of bank customers in both the Non-Robo Adviser groups and the Robo-Adviser groups who did not have a portfolio in 2016

Do Robo-Advisers indeed encourage market participation?

We carried out a study to evaluate the net benefits and net costs of Robo Advisers. Among the many aspects we considered, we sought to identify whether Robo-Advisers indeed increase market participation.

We focused on customers at a particular bank across years 2016 to 2018 who were invested in financial markets in 2017. In 2017 the bank introduced the Robo-Adviser. We compare investors adopting the Robo-Adviser in 2017 with investors not adopting the Robo-Adviser in 2017.

Figure 2 shows that 30% of the investors who used the Robo-Adviser entered the market for the first time in 2017—despite the fact that most of these investors were bank customers in 2016. Given the low trading fees at the bank we find it unlikely that these customers had investment accounts at another bank. Therefore, the Robo-Adviser seems to be appealing to investors who previously had no investment history. It thus seems as if Robo-Advisers are fulfilling the hope and increasing participation in financial markets.


  1. In the form of Defined Benefit plans
  2. Calculated as 10,000× (1+7.2%)^40-10,000×(1+4.98%)^40


  • Barber, B., & Odean, T. (2000). Trading Is Hazardous to Your Wealth:The Common Stock Investment Performanceof Individual Investors. Journal of Finance, 773-806.
  • Deutsches Aktieninsitut. (2019). Aktionärszahlen des deutschen Aktieninstituts 2018. Frankfurt a.M.: Deutsches Aktieninstitut e.V.
  • Finanztest. (2018). Robo Adviser: Die Maschine Machts. Finanztest, 42-47.
  • Morgan Stanley Wealth Management (2017). Wealth Management Perspectives. Retrieved from https://advisor.morganstanley.com/the-one-columbus-group/documents/field/o/on/one-columbus-group/Retirement_Participants.pdf
  • Odean, T. (1998). Are Investors Reluctant to Realize Their Losses? The Journal of Finance, 1775-1798.
  • Schmitz, J., & Schäfer, I. (2018). Das Rentenniveau. Messverfahren, Einflussfaktoren und Fehlinterpretationen. Soziale Sicherheit, 21-25.