Online advice is a hot topic, frequently the subject of animated and often heated discussion at industry gatherings. In most conversations, I sense both fear and greed in the sentiments expressed. Today’s advisors have had a front row seat as technology innovations have reshaped many businesses: changes in the travel business, book sales, music and the post office haven’t been positive for most workers in those industries, so the fear factor for advisors is understandable.
It’s also easy to understand the hint of greed in conversations about online advice, as advisors that are able to harness technology may be able to serve new client segments, manage existing relationships more efficiently and offer new services.
Curb Your Enthusiasm
The term “robo-advisor” is becoming ubiquitous, though we must admit to having a disturbing vision of the former governor of California whenever the term is used.
Hyperbole from online advice providers may invite some of the disdain coming from established financial firms. One of the best known online advice providers has compared itself to Apple, another to Schwab. Those kinds of comparisons remind me of the heyday of the technology bubble, when hype often substituted for sound investment thinking.
Apple transformed the computer industry by providing fun, easy- to-use computers; changed an entire way of life for music listeners with the iPod; and for its next act created a world of mobile computing and communication with the iPhone and iPad.
In financial services, Schwab was equally as innovative with a series of game-changing initiatives that transformed and democratized the investment landscape. Today’s Schwab is a giant that provides investment advice, brokerage services, banking and a host of other services to clients in person, online and by phone. Today’s online advisors may at some point have the same impact on the world as Apple and Schwab, but the comparisons at this point are aspirational rather than realistic and from a cynical point of view seem driven by a need to keep venture capital funding flowing.
We’d like to step away from the hype and appealing websites to examine the current state of the online advice industry. We’ll provide an overview of the early leaders in the industry, outlining the investment approach of each firm, and pose questions to be asked as the industry evolves.
The Most Widely Publicized Firms: Betterment, Wealthfront and Personal Capital Betterment and Wealthfront are primarily online providers, offering online support rather than a relationship with a human advisor. Personal Capital offers an approach that combines elements of the virtual and traditional advice world, using technology to augment the role of a human advisor.
Personal Capital offers more additional services than Betterment and Wealthfront, aggregating investment information as well as providing diagnostics to help clients assess 401(k) and mutual fund fees. Betterment and Wealthfront are low cost providers, with Betterment charging annual fees ranging from 0.15% to 0.35% and Wealthfront offering their services for free to small accounts and for 0.25% for accounts greater than $10,000. Personal Capital has a fee schedule that starts at 0.95%, which is comparable to traditional advisory firms and reflects the availability of a broader relationship with an advisor.
Each firm has a “dream team” of leaders, venture capital backers and advisors. Wealthfront has as its chief investment officer Burton Malkiel, the author of A Random Walk Down Wall Street, as well as an advisory board that includes Meir Statman, one of academia’s experts on behavioral finance and renowned consultant and author Charley Ellis.
Betterment is backed by prominent venture capital firms and recently added industry thought-leader Steve Lockshin to the fold as an advisory board member and leader of the Betterment Institutional offering.
Personal Capital was founded by Bill Harris, former CEO of Intuit and Paypal, and is backed by a who’s who of Silicon Valley venture capital providers and a board that includes industry leaders such as Charles Goldman and well known venture capitalists such as Steve Harrick.