Human wealth advisers are going out of fashio
AS PROBLEMS GO, the suspicion that you are being overcharged by a private wealth manager is one of the better ones to have in life. But even millionaires who are regularly invited out to lunch by their banker tire of the 1-3% annual fee they have to cough up for his investment advice. Many mere submillionaires may well be paying similar rates for an asset-management professional to administer their pension pot, often without being aware of it. Could a computer not do an equally good job dishing out standardised guidance on how much they should invest respectively in shares, bonds and other assets?
A raft of “automated wealth managers” is now available, on the premise that algorithms can offer sound financial advice for a small fraction of the price of a real-life adviser (see table). With names that suggest a mix of blue-blooded discretion and startup ebullience—Wealthfront, Betterment, Personal Capital, FutureAdvisor—they are growing at a rapid clip. Most are grudgingly starting to accept the tag of “robo-adviser”.
The platforms work by asking customers a few questions about who they are and what they are saving for. Applying textbook techniques for building up a balanced portfolio—more stable bonds for someone about to retire, more volatile equities for a younger investor, and so on—the algorithm suggests a mix of assets to invest in. Nearly all plump for around a dozen index funds which cheaply track major bond or stock indices such as the S&P500. They keep clear of mutual funds, let alone individual company shares. Testing the various algorithms, your risk-averse, youngish correspondent was steered towards an apparently sensible blend of low-fee funds to help his meagre retirement pot grow.
This sort of insight used to be guarded jealously by financial advisers, but now you can get it from the robo-advisers without so much as providing an e-mail address. The hope is that all but the most penny-pinching savers will then go on to purchase the mix of funds through the service, at an annual cost starting at around 0.25% of the assets invested. (Investors also pay the fees of the funds they buy, which adds another 0.15-0.30%.) Automated services offering more human involvement typically charge closer to 1% a year. Most have much lower minimum investment limits than their traditional rivals.
A major selling point for robo-advisers is that they promise they will not make any money from their customers other than through the annual fee. That is refreshing in an industry rife with potential conflicts of interest. Banks, for instance, often recommend that their clients invest in funds run by their asset-management subsidiaries. Most of the newcomers offer automatic rebalancing of portfolios, so an investor’s exposure to stocks or bonds stays much the same even as prices fluctuate. Many tout their “tax-loss-harvesting” capabilities.
The transparent fee structure appeals to sceptical younger investors, says Adam Nash, Wealthfront’s boss. Around 60% of its clients are under 35, many of them with starter fortunes from Silicon Valley, where the company is based. The average account size is a touch under $100,000, an amount that would be uneconomic for a Merrill Lynch or Morgan Stanley broker to handle.
Mr Nash, a veteran of Apple and LinkedIn rather than Wall Street, compares the current growth in robo-traders to the rise of Vanguard, which in the mid-1970s pioneered low-cost index funds as competition to pricey mutual funds. Charles Schwab sprung up at the same time to undercut large banks’ high-margin brokerages. What those newcomers were to the baby-boomer generation when it first started thinking about saving for retirement, Wealthfront is to the tech-savvy millennials at the same stage in their lives, he says.
Regulation has, if anything, helped the robo-advisers get off the ground. They emphasise that client assets are held by third-party depositary banks, still perceived as safe by the public. If one of them were to go out of business, investors would not lose any money. All are overseen by the same watchdogs as the incumbent banks they are taking on.
The robo-advisers are doubling their assets under management every few months, but their combined assets still run to less than $20 billion, against $17 trillion for traditional managers. Several banks manage over $1 trillion each. The robo-newcomers are nowhere near big enough for sustained profitability, says Sean Park of Anthemis, an investment firm that has backed Betterment. “To be successful [a firm] needs to manage tens of billions; to be really successful they need to manage hundreds of billions.” In the meantime, they are living off the largesse of venture capitalists, who poured nearly $300m into various robo-advisers last year.
If they are to be successful in the longer term, they will have to persuade today’s 20-somethings to remain loyal to automated services when they become wealthier 40-somethings. Traditional investment advisers think they can win over older customers by offering them services such as inheritance planning. But just in case, the incumbents are working with the robo-insurgents.
Schroders, a large European asset manager, has backed Nutmeg, Britain’s largest newcomer. Vanguard, the group that puts together the low-fee funds that most robo-advisers recommend, is launching its own low-cost advisory service. JPMorgan Chase and Goldman Sachs have backed Motif, a startup that builds baskets of stocks based on investment themes. Charles Schwab, now a wealth-management giant with $2.5 trillion under management, in March rolled out its own automated wealth service, targeting people with as little as $5,000 in savings. It charges no fees upfront but guides clients towards some of its own investment products—a breach of the unwritten robo-advisory code.
Schwab’s arrival was discreetly celebrated as a validation of the automated advisory model. A truce of sorts seems to be in the offing. Betterment now offers a “white-label” version of its platform, so that human wealth advisers can pass off the computers’ diligence as their own. Fidelity, a giant financial-services firm, is among those trialling the service. Human-based advisory services point out they have lots of clever computer wizards working for them. Robo-advisers, for their part, boast about the pioneering investment thinkers they employ, programming the computers to recommend the right products.