We've talked about who we hire to advise and manage our wealth. But how is technology changing what we actually invest in? The answer lies in active vs. passive management. An actively managed fund means someone researches and chooses stocks in an effort to beat the broader market. As you might expect, this requires a lot of human capital and research hours. Which means these funds are more expensive. On the other hand, passive index funds are baskets of stocks created to track the market, not to beat it. For example, the Vanguard 500 is a passive index fund that tracks the S&P 500. If Apple makes up 3% of the S&P 500, then for every $100 invested in the Vanguard 500, Vanguard allocates $3 to Apple stock. Index funds invest according to a formula. Like robo-advisors, they are much cheaper than their human counterparts.
For a long time, people believed that active managers could consistently outperform the market. The problem is that humans are inherently flawed and can make costly mistakes based on whim or emotion. On the other hand, a passive index fund is objective and runs on autopilot according to a formula. More and more individuals and institutions have transitioned from an active strategy to a passive strategy largely due to under-performance from active funds. While you give up the ability to beat the market with a passive fund, you can at least be sure that the market won't outperform you.
Now, don't get me wrong. There are active funds out there that perform quite well. My point is that passive index funds are popular among investors for their simplicity, low cost, and solid performance. Robo-advisors invest your money in low-cost passive index funds, while financial advisors assume a more active strategy.