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November 07, 2014 at 03:39 AM
Robo-advisors have proliferated, but why? In a session on Wednesday at Schwab Impact in Denver, Bill Doyle of Forrester Research gave three reasons: industry conditions favor innovators, the technology works and, most importantly, clients want it.
Reason 1: Conditions Are Favorable
“Regulators favor upstarts,” Doyle said. They like the robo-advisors because the business of providing advice electronically leaves an electronic trail, he said. Furthermore, when advice comes via an algorithm, it’s “consistent and objective.”
ETFs make constructing inexpensive portfolios easier, too. “Some literature says passive is more stable” and ETFs are superior over the long term, Doyle said.
(Schwab’s robo-advice offering, the coming Schwab Intelligent Portfolios, uses all ETFs in its portfolios. See Schwab’s Bettinger, Clark: RIAs Must Evolve; Robos in ‘Top of the First’.)
Reason 2: The ‘Technology Finally Works’
The cloud is cheaper than a mainframe, and APIs help businesses work together seamlessly. Doyle used Wealthfront as an example. The wealth manager uses Bloomberg to supply it with market data, Apex for clearing and Vanguard for ETFs. In two and a half years, Wealthfront reached $1 billion in assets under management, more than twice as fast as Charles Schwab, Doyle said.
Robo-advisors can operate much more cheaply, too. The average annual fees for actively managed mutual funds are 1.5%, according to Forrester, compared with robo-advisors like Wealthfront’s 0.25%.
Depending on which robo-advisor a client chooses, they may be getting more human involvement for their lower fees. Rebalance IRA and AssetBuilder have their low fees (0.5% and 0.45%, respectively), but also provide more “hand holding” than Wealthfront, according to Doyle.
Reason 3: Clients Want It
