This fall, his upstart automated investment management firm having just secured a $64 million capital infusion, Wealthfront CEO Adam Nash outlined an ambitious plan to conquer the millennial market for financial advice, if not to alter the course of the entire advisory segment, declaring that “the future [of investment management] is automated.”
“We don’t believe we’ll kill Charles Schwab,” Nash wrote in a blog post on the Wealthfront website. “It is a great company, albeit focused on a different customer—the baby boomer. We do believe, however, that we’ll force Charles Schwab to become even better.”
A week later, Schwab CEO Walt Bettinger went out of his way at the firm’s annual IMPACT conference to assure advisors that his own company’s soon-to-be-released “robo” online advice platform poses no competitive threat to them.
Meanwhile, Swiss research company MyPrivateBanking Research recently predicted that global assets managed by so-called robo-advisors would reach $14 billion by the end of 2014 (83 percent attributable to U.S.-based firms), increasing to an estimated $255 billion within five years. Though even that figure is dwarfed by the estimated $5 trillion that conventional U.S. wealth managers currently oversee, the Swiss firm views robos as “a real threat to the business models of conventional wealth managers.”
Amid the buzz that surrounds them as VC darlings and Davids to Wall Street’s Goliath, do robo firms that deliver lower-fee, Web-based investment management services on a largely automated, passively managed platform present an immediate and genuine threat to the traditional face-to-face, brick-and-mortar model?
The answer is far from clear-cut. Indeed, it depends largely on the type of advisor, the types of client the advisor is seeking, and the advisor’s ability to evolve along with their clients’ needs and wants.
“The real threat [posed by robos] is to advisors who don’t have a clear value proposition, who aren’t very clear on who they serve and why they serve them,” says Adam Cufr, RICP, founding principal at Fourth Dimension Financial Group, a wealth management firm in Perrysburg, Ohio.
What is already abundantly clear, however, is that advisors who ignore this new breed of Web-based advisory firms— automated investment managers, eRIAs, digital advice providers, online financial advisors, robos, call them what you like—do so at considerable risk. The rise of the robo-advisor is, at minimum, a call to action for flesh-and-blood advisors to:
1. Beef up the Web-based tools they offer clients.
2. Bolster transparency.
3. Diversify their investment approach.
4. Justify their value proposition.
Those who don’t not only risk losing client assets to automated providers, they also may miss out on a golden opportunity to make new inroads in several market segments targeted by the robo set but hitherto largely underserved or overlooked by traditional advisors and advisory firms:
Millennials and digitally oriented do-it-yourselfers who prefer their investment assets are handled by online tools. “People who are comfortable giving their retirement accounts over to a computer,” says Scott Puritz, managing director of Rebalance IRA, a Web-based advisory firm that caters to the 45+ set, managing some $225 million in retirement plan assets using a passive, ETF-based diversification strategy. “The traditional role of the human advisor is not going away anytime soon,” he says. “But they will have to fight [with robos] for clients who are in their 20s and 30s.” Investors who are especially wary of investment-management fees—and of the firms and advisors that charge such fees. Robos typically charge fees ranging from 25 to 65 basis points, compared to the 150 to 200 or more basis points that local flesh-and-blood advisors and brick-and-mortar firms typically charge, according to Jack Waymire, founder of Paladin Research & Registry, a Roseville, California-based research firm that tracks the financial advisory community.
Investors with smaller asset portfolios (under $100,000, for example) who thus have relatively simple “auto-pilot” investment management needs
Investors who prefer that their assets be managed passively.
Know your robo
The robo population today consists of about 20 firms that provide mostly automated, Web-based services with lower minimums and lower fees compared to traditional wealth managers (see the sidebar at right for a closer look at the robo population). Other more entrenched incumbents such as Schwab, Fidelity and Vanguard are also entering the fray with robo-type platforms.
To keep fees lower, robos rely mostly on passive investment instruments such as ETFs and index funds, typically charging a few more basis points for services like automatic rebalancing and tax loss harvesting. Some robo firms, such as Betterment and Wealthfront, are fully automated, while others, such as Vanguard’s platform, blend automated investment management tools with personal financial advice.