So-called robo-advisers look poised to shake up the U.S.
financial services industry. Dozens of recently launched online
providers, invariably backed by venture capital firms, offer
asset management and financial planning to investors who
arent looking for the personal touch that has always been
a hallmark of wealth management. The total U.S. assets managed
by this group, whose leaders include Betterment, FutureAdvisor
and Wealthfront, are nearing $17 billion, according to New
Yorkbased research firm Corporate Insight.
Proponents say online-only advisers will carve out a market
share like online discount brokerages did in the 1990s.
More-bearish observers regard financial advice and management
as something that the average investor is much less likely to
entrust to a software program than filing taxes or booking a
vacation. Recent strategic shifts by online firms appear to
support the view that they will have trouble turning a profit
without adding real, live humans to the mix.
Robo-advisers come in two flavors: those that manage assets
on a discretionary mandate and those that provide advice only,
often à la carte via financial planning and management
software supplemented by educational materials on investing in
stock and bond markets. Most of the former deploy passive
algorithmic portfolio strategies weighted to the risk profile
of an individual investor and use
These new market entrants have proven adept at gathering
assets from Internet-savvy Millennials, the generation born
between 1981 and 1996. But as investors
acquire wealth and take on family responsibilities, they need
services that only a flesh-and-blood adviser can provide,
contends Mark Ciucci, senior vice president of advice at United
Capital Financial Advisers.
We dont believe that investors
will stay with the robo-advisers for the long term, for the
simple reason that the closer they get to retirement and
realize that another market downturn could derail all of their
plans, they will seek advice that goes beyond simple portfolio
allocation, says Ciucci, whose Newport Beach,
Californiabased firm has 47 offices throughout the U.S.
and some $10 billion under management.
We believe investors
will work with a human adviser who can validate that they are
on the right track in their unique circumstance and not based
on some blanket concept like the 4 percent rule, he adds,
referring to a rule of thumb for the maximum that retirees
should withdraw each year to avoid depleting their savings.
Human advisers are valuable because they can look at an
investors situation holistically, like a doctor choosing
from a range of treatment options, Ciucci says.
Helping make his case is FutureAdvisor, a San
Franciscobased robo-adviser that has focused on
mass-affluent clients since it launched in 2010. At $140,000,
the firms average account size is much larger than those
of its main rivals, albeit with just 1,500 paying clients,
versus 150,000 users of its free advisory platform.
FutureAdvisor plans to expand its personal services as
customers needs become more complex, says Chris
Nicholson, head of communications and recruiting.
For now, though, Nicholson sees an open playing field for
online-only advisers to tap into an emerging investor group.
The important thing to remember is that robo-advisers are
serving millions of mass-affluent families that wire houses and
independent advisers never had time for because they were not a
profitable demographic, he says.
According to Nicholson, online advisers help their
full-service counterparts by broadening the base of investing
households and teaching future affluent families to expect and
rely on financial advice. Although he thinks services like
FutureAdvisor will eventually account for a big chunk of
passively invested portfolios, he predicts that traditional
advisers will maintain an advantage when it comes to providing
more-complex and customized services.
The online upstarts may dismiss skeptics as Luddites, but
their long-term prospects remain cloudy. Robo-advisers derive
their business strategies from consumer technology conventions
rather than financial services norms. They offer free or
ultralow-cost services to bring investors on board, then upsell
clients on premium products as account balances grow.
As a result, most of these firms have relied on venture
backing, so they face the same challenge as any other
mass-market start-up: hitting sustainable profitability before
their capital runs out. Based on revenue extrapolated from
stated fees and assets under management, combined with
announced venture capital injections, none of the top players
is close to turning a profit, industry insiders say.
Recent changes at two of the biggest robo-advisers suggest
that such outfits are rethinking their business models. Rather
than compete with humans, New Yorkbased Betterment is
offering a new service for independent financial advisers that
will launch in beta in September. The four-year-old firm, which
counts venture capital patrons Anthemis Group, Citi Ventures
and Menlo Ventures among its investors as well as traditional
wealth managers Bessemer Trust Co. and Northwestern Mutual
Capital, has more than 41,000 direct clients.
Betterments ability to combine the low-cost online
experience with human guidance is a win-win, co-founder and COO
Eli Broverman says. We see a great opportunity to work
with advisers and empower them to have a best-in-class
investing product driven by technology so they can spend their
time focusing on other challenging areas like estate
However, its unclear if Betterments initial
offering for advisers can set itself apart from existing
customer relationship management and reporting vendors or the
platforms offered by custodial broker-dealers. It will
ultimately all come down to the price point, says Richard
Dee, CEO of Lake Tahoe Wealth Management. Planning
software, cloud-based reporting resources and quantitative
portfolio-rebalancing models are already very readily available
Dee thinks the most compelling offering for wealth managers
considering a provider that combines planning, asset management
and CRM services would be a low-cost product they could use for
smaller accounts. He half-jokingly calls his firm a cyborg
adviser; launched in 2012 and headquartered in Zephyr Cove,
Nevada, it combines online access to advisers and portfolio
information with high-touch personal service.
Wealthfront the largest online adviser, with some
13,000 clients and an average account size of $90,000 is
setting its sights on the institutional marketplace instead of
expanding into the more service-intensive segments of the
individual-investor market like its competitors. Launched late
last year, the firm manages $1.3 billion in assets.
Wealthfront takes the same approach to client services for
501(c) investors nonprofit entities such as
pensions as for individual customers. The Palo Alto,
Californiabased firm charges no fees for the first $1
million in assets and 25 basis points thereafter. CEO Adam Nash
describes this move as a complementary offering rather than a
shift in strategy: This is a part of our mission, that
everyone deserves sophisticated financial advice.
Nash insists that Wealthfront remains focused on the
Millennial market, which he estimates to account for 90 million
people in the U.S., with a combined net worth of more than $2
trillion that could rise to $7 trillion by 2018. So far, the
firm has raised some $65.5 million from the likes of Greylock
Partners, Index Ventures, Ribbit Capital and Social+Capital
Partnership, as well as angel investors, including
Marc Andreessen and Ben Horowitz of Andreessen Horowitz and
Yahoo president and CEO
Our company will grow its services with Millennials,
similar to what Charles Schwab did for the baby boomers,
Nash asserts. Schwab, which germinated from an investment
newsletter business in the early 1970s, revolutionized the
discount brokerage industry, becoming a giant in just two
decades. Whether robo-advisers venture patrons can wait
that long for success is an open question.