I understand sales and appreciate good marketing. In fact, I just completed the manuscript for my new book, "The Smartest Sales Book You'll Ever Read", which explores these subjects and reaches some groundbreaking conclusions about them.
Jon Stein is the CEO of Betterment, an online investing site. I am a fan of this site. It follows sound investing principles, charges low fees and uses low management fee exchange-traded funds in the stock and bond portions of the portfolios of its clients. A competing site, Wealthfront, follows the same basic philosophy. Investors who are using retail brokers would be well advised to consider Betterment and Wealthfront. They are far more appealing options.
Both Betterment and Wealthfront are struggling to generate assets under management. According to its Form ADV Report filed with the SEC in October 2012, Betterment had only $159 million in assets and 18,855 accounts. Wealthfront reported $187 million and 2,704 accounts in its Form ADV report also filed in October 2012.
While these online sites fill an important niche for investors, they do have their limitations. A recent article in Forbes by Stein was titled "Why I Choose Software Over A Human For Investment Advice". It really was a marketing piece for Betterment. Stein makes the case for replacing personal contact with investment advisers with online services like Betterment. He correctly notes that software is not influenced by emotions and has no conflicts of interest, among other benefits. That's all true, but his argument falls far short of making his case.
Online sites like Betterment and Wealthfront may be excellent alternatives for smaller investors who do not require a customized portfolio. For investors with significant assets, they have serious limitations. For example, as I noted in a previous blog post, laddered bonds may be suitable for some larger investors. This is not an option offered by online sites.
There are other constraints of online investment firms. They only provide investment advice. There are many other aspects to wealth enhancement. These include advising on investments in tax-deferred plans not managed by the adviser and considering the benefits of tax-free bonds, capital-loss carryovers, phase out of miscellaneous deductions and alternative minimum tax issues and many other issues.
Wealth enhancement is only one aspect of wealth management. A competent adviser will be concerned about wealth transfer, wealth protection and charitable giving, if appropriate.
A wealth adviser will review all of your insurance policies, your income tax returns, estate plan, buy-sell agreements, employment agreements, health care proxies, prenuptial and postnuptial agreements, powers of attorney and all other agreements relating to your financial life. He or she will become your virtual chief financial officer and will be the focal point for all financial decisions.
I wish Betterment, Wealthfront and all other online registered investment adviser firms continued success. Every client they get will not become a victim of the securities industry, and that is a very positive result. However, these services will never replace those of us who are real wealth advisers to our clients.
Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His latest book, 7 Steps to Save Your Financial Life Now, was published on Dec. 31, 2012.
The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.
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