The software that wants to 'eat' do-it-yourself investing
Software designed to deliver individually tailored recommendations: It powers your Facebook app, your FitBit band and, increasingly, your finances.
The young, fast-growing firms built around online asset-allocation engines are typically portrayed as occupying a niche, providing a digital alternative to traditional investment services for young and plugged-in investors.
Naturally, grander ambitions drive the pioneers of this business, such as Jonathan Stein, founder and CEO of Betterment.
“In the future, this automated online investing is going to be the way everybody does it,” Stein says in the attached video. “I think in the future we’re going to look back at people who do their own investing without advice like people who do their own dental surgery on themselves – something you’d be just crazy to do.”
Of course, the tens of thousands of wealth advisors offering comprehensive guidance to investors, and the Big Four discount brokerage firms enabling cheap trading of stocks, bonds and funds don’t see this shift as quite so inevitable.
Yet more and more, the industry is recognizing that these so-called “robo-advisors” could grow to command a big chunk of the retail investment industry – in the way that earlier, democratizing innovations such as mutual funds, exchange-traded funds and online trading did.
Certainly, established financial-services giants can’t ignore the growth rates enjoyed by the newer firms. New York-basedBetterment, founded in 2010, has more than doubled its client assets to $2.5 billion this year alone, and just reached 100,000 customers. Wealthfront, its close Silicon Valley rival, also crossed $2 billion in recent months after less than four years in business. Personal Capital, which combines an online investment-advice engine with access to a team of human advisors, has $1.5 billion.
These are small numbers in the multitrillion-dollar asset management and advisory industry. But the growth has been remarkable and the client demographics enviable.
That’s why index-fund pioneer Vanguard and retail investment-services giant Charles Schwab Corp. (SCHW) have launched their own robo-advisor services.
Get the Latest Market Data and News with the Yahoo Finance App
All the players promote their unique product tweaks, asset-mix models and look-and-feel. And they have squabbled over which approach is best. But at their core, they are largely alike.
All of them allow clients to sign up quickly online by entering some basic financial details and answering some questions on risk tolerance and long-term goals. The software then sets a portfolio of low-cost ETFs, keeps the mix in balance and automatically harvests losses for tax-minimizing purposes.
Of course, because the software is simply stuffed with well-known prevailing wisdom about diversification, low-fee funds and steady saving behavior, it’s possible for anyone to simulate one of the robo portfolios and save the 0.35% of assets or so that these firms typically charge per year. (That’s in addition to the management fees on the underlying ETFs, which are typically less than 0.5% a year.)
Indeed, Cullen Roche, an investment advisor and founder of Orcam Financial Group, tweeted this week: “I think we should call the Robo ‘Advisors’ what they really are. Passive investing for someone too lazy to rebalance once a year.”
Existing products such as target-date retirement funds and asset-allocation funds such as Vanguard Tax-Managed Balanced mutual fund (VTMFX) offer a roughly similar package, the latter at just 0.12% in total expenses a year.
Stein, though, says properly keeping a portfolio on track, regularly allocating new cash to it and implementing tax-smart tactics the way Betterment does could be approximated. But that might take close monitoring and would fall short of certain technological efficiencies, such as trading in fractional shares of stock and automatically sweeping cash from a bank account into the portfolio when a balance rose above a preset level.
This is not to suggest that Stein believes a pure digital service will, or should, replace real people who help guide investors.
“Human advice still has a big place,” he says. “Lots of people want a little more guidance for what their goals should be.”
The firm has launched Betterment Institutional, a service to run the operational side of human financial advisors’ practice using the same platform backing the core Betterment retail service.
Think of this as furnishing the robotic tools, perhaps, that help a human dentist perform surgery on his patients.
