Make a list of all your money worries. Where does “Too much spare cash” rank?
If having surplus cash piling up uninvited doesn’t seem like a pressing concern, then the entrepreneurs running today’s leading automated investing services would like a word with you.
Companies such as the pugnacious rivals Betterment and Wealthfront would apparently rather snipe at one another than express agreement. Yet these fast-growing services – which offer easy, low-cost online investment accounts – strike the same note when it comes to the “risks” of having too much cash uninvested in the markets.
Betterment, in fact, is now launching a new feature that will constantly monitor a customer’s bank account and automatically move any cash above a preset target balance into his or her investment portfolio.
Called SmartDeposit, the tool fits with this burgeoning industry’s focus on automating each individual’s retirement-savings plan and monitoring it for adherence to investment models steeped in long-term market simulations and behavioral-finance theory.
While Schwab contends a cash reserve is prudent risk management, Nash focused on the potential lost market appreciation over an investing lifetime due to this “cash drag” – and the fact that the cash would be placed in bank deposits on which Schwab earns interest.
One interesting element of Betterment’s SmartDeposit idea is that it runs somewhat counter to a dominant trend in the brokerage industry in recent years of “sweeping” excess cash from brokerage accounts into FDIC-insured deposits. While this can be of slight help to clients in times when deposits pay interest, it’s of substantial benefit to the firms themselves, which can earn a spread on those customer cash balances.
Overriding human emotion
The hostility of the so-called robo-advisors toward cash gets to the core of their approach to money management.
These companies distill market history and finance theory into multi-decade return assumptions for all asset classes, which then feed algorithms to drive individual asset allocations -- integrating clients’ risk tolerance as determined by brief questionnaires completed in the account-opening process.
Their models reflect the reality that long-term investing success is determined mostly by maximizing saving over long periods and investing the money at low cost.
Betterment and Wealthfront have grown quickly from small bases, as their message captures both the powerful trend toward low-cost index-fund investing and the broader encroachment of software replacing or mediating among human-provided services.
Yet the resonance of this sales pitch among retail investors has no doubt been helped by the fact that these firms came on the scene near the start of the current bull market in stocks.
“Cash drag” is not something most humans – who suffer from ingrained “loss aversion” tendencies – view as an evil during bear markets.
While the Betterments and Wealthfronts of the world are trying to (quite literally) encode smart investing behavior into their services to override inherent human tendencies, traditional advisors insist that reading each personal situation and managing anxieties is a central way they earn their (higher) fees.
Players such as Personal Capital, for instance, seek to marry these approaches with a high-tech financial-planning engine free to everyone and human financial advisors who clients can call upon as needed.
While this industry is often depicted as being consumed by a man-versus-machine battle, there is a continuum of needs and services that people can choose among. And interestingly, the fiercest competitive rhetoric is flying between Betterment and Wealthfront, which are locked in a contest of prickly one-upmanship.
Wealthfront’s Nash last week wrote a blog post skewering Betterment by name for an account-maintenance fee charged to some clients who don’t use auto-deposit. Betterment founder Jonathan Stein parried with an aggressive “fact-check” post that also made a point of belittling Wealthfront’s growth rate and pedigree.
It’s as if these companies are trying to wrest the moral high ground that both of them can legitimately occupy together.
As financial advisor and author Meb Faber of Cambria Investment Management recently pointed out, these are fortunate times for investors given the wide availability of smart, cheap and easy portfolio management services such as those offered by Betterment and Wealthfront.
In the crucial ways, they are very much the same, even if Wealthfront cloaks itself in Silicon Valley disruption and Betterment is a New York-based innovator whose founder came out of the banking technology realm.
Their sniping is reminiscent of the observation known as Sayre’s law, often applied to faculty politics: “In any dispute the intensity of feeling is inversely proportional to the value of the issues at stake.”