A wave of technology startups, called robo-advisers, are threatening to shake up the investment management world — the latest front in the ongoing trend of digital transformation.
Robo-advisers use Web-based platforms that can analyze an investor’s risk tolerance and investment goals and create an optimal portfolio, typically invested across a mix of low-cost exchange-traded funds.
The platforms will automatically rebalance holdings in a tax-efficient way, charging a fraction of what the established financial firms and investment advisers now command.
Led by venture-backed firms such as Wealthfront and Betterment, the robo-advisers are few in number and control a comparatively small amount of assets — $5 billion among them. But they are growing quickly and their potential to upend the industry is huge.
“This generation of digital players are going to punch through, and when they do, all hell will break loose,” warned Bill Doyle, an analyst with Forrester Research, speaking at Schwab Impact 2014, a gathering of about 5,000 advisers and other financial types in Denver last week.
Several trends are working in favor of the robo-advisers, including the shift toward all things digital, even in areas once considered unlikely — say buying shoes or finding a spouse. Young adults in particular prefer to find answers online rather than through human advisers.
“Clients prefer to engage on digital channels even when they have advisers,” said Doyle, who notes that the average adult in the U.S. now spends more time online than watching television.
Exchange-traded funds provide a cost-efficient investment vehicle that was lacking in the past. And cheaper computing power has made complex asset allocation algorithms, once affordable only to the wealthy, accessible to the masses.
The biggest weapon that robo-advisers bring to the battle, however, are lower costs. Robo-adviser’s fees start around 0.25 basis point versus the 1.18 percent that a private client investment manager charges and the 1.5 percent charged for an actively managed mutual fund.
An investor using an adviser who depends on actively managed mutual funds can wind up paying 2.7 percent or more a year. A robo-adviser might charge 0.45 percent of assets between its cut and that going to the funds it uses.
Compounded over the decades-long race to retirement and that cost difference can be huge for consumers.
Silicon Valley startup Wealthfront is considered the leader in the new field, with $130 million raised from investors and more than $1.5 billion in assets.
The firm accumulated its first $1 billion in assets faster than Schwab did in the mid-1970s by convincing young investors they could call on the phone for advice from a broker assigned to them, Doyle said.
Not willing to be outflanked, the financial giant announced Oct. 27 it would launch its low-cost counteroffensive called “Schwab Intelligent Portfolios,” which should roll out in the first quarter of 2015.
Schwab will offer its platform for free in-house and will provide a version for the investment advisers who team with the firm to oversee more than $1 trillion in assets.
Schwab can offer a free platform because it owns the exchange-traded funds the platform will use and because of the huge capital investment the firm has already made in technology.
“It is far more efficient for the consumer,” Walt Bettinger, Schwab’s CEO and president, said of the proposed offering.
Advisers at the conference expressed attitudes toward the emerging trend ranging from acceptance to defiance.
Nathan Mersereau, president of Planning Alternatives in Bloomfield, Mich., said automated investment platforms offer a way to engage consumers that advisers aren’t reaching right now because of investment minimums that are too high for them.
He said advisory firms would do well to “lean into” the trend rather than fear it. But that requires advisers taking a hard look at what they charge and whether it is justified.
“It will bring fee awareness,” Mersereau said.
Susan Chase Korin, with Balasa Dinverno Foltz in Chicago, doubted whether automated systems could serve the needs of higher net worth clients, who require a more customized approach.
Betterment’s average account size is $50,000, and Wealthfront is about $90,000, and the larger a client’s assets grow, the more customized advice they require. Balas Dinverno Foltz has a $1 million minimum.
J. Todd Douds, senior vice president of research and operations at Fort Pitt Capital Group in Pittsburgh, predicted robo-advisers will push his industry in opposite directions.
Some will seek safety on higher ground, focusing on wealthier clients who need more complicated and customized advice. Others may adopt the technology to reach clients with a lower net worth.
“You will have to understand what your value-added is,” he said.
Doyle said a haven still remains for those advisers who can provide a broad range of financial planning services beyond portfolio management.
“Financial planning is still an untapped part of this digital disruption,” Doyle said.
Aldo Svaldi: 303-954-1410, asvaldi@denverpost.com or
Updated, November 10, 2014 at 11:30 a.m.: This online archive has been edited to correct incorrect information provided by a source regarding the assets under management by Wealthfront and the firm’s average account size.
