Jack Waymire: Mathematicians are not chief investment officers, analysts or portfolio managers.

Online RIAs will mostly fail -- and here are 10 reasons why

Firms like Personal Capital, Covestor and Betterment are garnering both media attention and big VC bucks -- but backers severely underestimate the tie between investor and advisor

May 24, 2012 — 2:43 AM UTC by Guest Columnist Jack Waymire

68 Comments

Brooke’s Note: Early in my career I spent six years as a business broker based in Cambridge, Mass. Occasionally we’d list a laundromat for sale and run an advertisement for it in the Boston Sunday Globe. On Monday morning, the phone would be flying off the hook.The callers were doctors, lawyers, MBAs and engineers, in addition to recent immigrants who composed our more usual pool of buyers. The reason for such avid interest in owning a laundromat among professionals was that the rooms of washers and dryers were presumed to be self-operating. See: Why I find the term 'robo-advisor’ objectionable and unhelpful. But buyers who purchased these businesses on that basis were sorely disappointed and lost most of their investment. Turns out laundromats require tremendous attention to really hum and for machines not to get beaten up for eating quarters. So I come into this debate on do-it-all advisory websites with that bias about self-operation and some of Jack Waymire’s thoughts here have only fueled my skepticism. I also know it could be a “Dewey wins” headline.

Several well-known venture capital firms have invested substantial sums of money in startups that believe they can revolutionize the way investors obtain financial advice. Their goal: to replace the traditional fee-based advice model with online services that claim do a better job for a lot less money. See: Betterment’s Jon Stein talks human-RIA coopetition but breathes fire about fellow online RIAs.

These firms believe they have the answer for investors who are fed up with the perceived mediocre results and high fees of personal financial advisors. In effect, they want investors to fire their financial advisors and move their assets onto their platforms.

A prominent example of such an online RIA is Personal Capital (which in March launched an iPad app. See: Why RIAs are shunning mobile apps and why Black Diamond, Orion, Fidelity and others are still placing their chips on an iPad future). Other upstart online advisors attracting attention from the media, in a addition to VCs, are Covestor Investment Management), Betterment), Wealthfront and FutureAdvisor.

Financial advice is already highly automated. There are computer programs that develop financial plans, create investment policies, allocate assets, select managers and re-balance portfolios, report performance and process transactions. However, investors currently obtain the programs’ output from financial advisors who know how to use the software to produce advice, solutions and decisions. It was inevitable that some enterprising entrepreneurs would integrate the tools and offer them to investors over the Internet for reduced fees. See: RIAs and online brokers are winning the market-share game.

Ties, but how strong?

Based on the content on their websites, these companies believe investors will sign up in droves if they give them a nominal amount of information, a friendly user experience and some level of assurance for investment performance. See: A departing NestWise advisor tells what he learned from the whole experience.

But I believe these companies and their financial backers have badly underestimated the strength of the relationships that exist between investors and advisors. For this reason, I believe these websites will fail or, at best, be marginally successful. Here’s why.

1. Notwithstanding mediocre performance and higher expenses, advisors dominate their relationships with investors. Investors wouldn’t know what to do without their advice and services.

2. A high percentage of investors believe stockbrokers are investment advisors because that is what they were sold. However, that belief exists and strong relationships have developed over a period of years.

3. Young investors, who don’t have advisors, may embrace this form of “black box” investing. However, older investors, who have been burned in the past, will be more skeptical. In fact, most experienced investors have been educated to avoid investment strategies that are based on undisclosed algorithms.

4. Young investors may be a bit naïve, but even they will question how these online firms deliver “simple yet sophisticated” investment services with few or no investment professionals. Mathematicians are not chief investment officers, analysts or portfolio managers. One site even referred to its professional staff as Silicon Valley engineers. See: Bloomberg warns that BloombergBlack is shutting down.

5. Investors with larger asset amounts are more cautious and skeptical. they will question how the online firms have developed magic investment formulas when hundreds of Wall Street Ph.D.s using Cray supercomputers could not. See: How analytical advisors can finally supersede salesy advisors.

6. Here is a major disconnect: Investment firms which profess to have magic formulas that produce exceptional returns do not manage $20,000 accounts for $50 per year. They would market their services to investors with much larger asset amounts or keep their formulas in vaults and enrich themselves.

7. Investment products are sold, not bought. Someone has to convince investors to buy what the financial services firms are selling. This process is easier when the seller is face-to-face with the buyer.

8. Most investors rely on personal interaction to determine whom they can trust with their money. It is not ideal, but most investors use subjectivity when they select advisors: personalities, brand names, location, appearance and sales presentations.

9. Money is a very emotional topic. Consequently, investors have personal relationships with their advisors. They respect professionals who listen to their goals and concerns and adapt their advice to their individual requirements. This need is not satisfied with cookie-cutter services. See: In what may be a first, an RIA brings on a psychologist as a financial planner.

10. If these sites want to make me a believer they should disclose their growth in clients and assets. Until they provide this disclosure, I will continue to believe this latest and greatest investment “concept” should come with a warning label.

The old-fashioned way

Online companies will need a lot more venture capital money to build brand names that produce major financial benefits. And, those benefits will have to be tangible and irrefutable. Sales claims will not get the job done when you are up against the establishment.

Meanwhile, I will continue to use the services of a financial advisor and I will tell my Internet-savvy children to let someone else test the validity of the online service companies’ assumptions and algorithms.

Jack Waymire spent 28 years in the financial services industry. For 21 years he was the president of an RIA that provided services to more than 50,000 investors. He is the author of Who’s Watching Your Money? — the first book that provided an objective process for selecting higher-quality financial advisors. Waymire is also the founder of InvestorWatchdog.com , a website that provides free tools and data to investors who use the services of financial advisors. He is a columnist for Worth magazine and a blogger on major financial websites, and is frequently quoted by the media.

Final Note: Whether people win or machines win may depend on how much RIAs change with the times. See: Why Joe Duran believes that classic RIA firms face extinction.


Mentioned in this article:

Paladin Registry
Marketing Firm, Investor Referrals
Top Executive: Jack Waymire

Wealthfront
Portfolio Management System, Other, Tech: Other
Top Executive: Andy Rachleff

Betterment Holdings Inc.
Financial Planning Software, Asset Manager for RIAs, ETF Manager
Top Executive: Jon Stein



Share your thoughts and opinions with the author or other readers.

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Mark Kennedy said:

November 22, 2015 — 8:09 PM UTC

As the owner of an RIA firm, these so called 'robo advisors’ provide nothing of value to the client except a trading platform. When it comes to RMD distribution and knowing what accounts they should satisfy that from, when it comes to death claims and how to properly fillout claim paperwork so the kids or surviving spouse don’t have a tax nightmare, when it comes to inherited IRAs, and the best way to structure, when it comes to tax planning and advice, when it comes to long term care solutions and what to buy or how to fund this potential nightmare, when it comes to the estate 'death’ tax and how to pay for it or estate planning strategies or trusts, when it comes to knowing how to aggregate and rollover 401ks to IRAs, when it comes to listening about a client’s desire to setup 'something for the grandkids’ and what that should be and how to best set that up, when it comes to severe stock market drops and how to counsel a client through this so they don’t panic and make a stupid mistake of reacting and selling everything, when it comes to getting lifetime income in retirement via properly designed annuity strategies and what annuities the clients should buy with what income riders and how to best strategize income bucketing for inflation and to meet RMD requirements if it is an IRA account…these are the things these 'tech smart’ but advisor 'stupid’ robo firms cannot offer. So I don’t view them as competition at all. I know I am not replaceable by these uneducated tech geeks and the only reason people are moving money to them is because we’ve been in a 6 year 'bull market’. What about when the market changes, or drops 52% like it did from late 2007 to March of 2009? How will the robos handle panicking clients who are losing half their entire life savings? So good luck to them. I disagree with most commenters of the article. I think it will just be a matter of time before they drive themselves out of business.

Mark Kennedy
President, Kennedy Wealth Management LLC
www.kennedywealthmgmt.com

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Nervous Cat said:

October 31, 2014 — 1:41 PM UTC

Schwab Intelligent Portfolios could be a game changer.

https://intelligent.schwab.com/

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Nervous Cat said:

August 19, 2014 — 8:16 PM UTC

And Jack Waymire is featured in this article – 21 Best & Worst Robo-Advisors for Client Transparency

http://www.thinkadvisor.com/2014/08/14/21-best-worst-robo-advisors-for-client-transparen

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Nervous Cat said:

August 19, 2014 — 8:08 PM UTC

Here’s another related article – 10 Best Ways to Compete Against Robo-Advisors

http://www.thinkadvisor.com/2014/08/19/10-best-ways-to-compete-against-robo-advisors?t=economy-markets

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Brooke Southall said:

July 8, 2014 — 9:11 PM UTC

Shaun,

What your post lacks in useful argument it makes up for in stridency!

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Shaun said:

July 8, 2014 — 7:32 PM UTC

Online RIAs will mostly fail…

... and the ones that will survive will wipe out most traditional RIAs. Boom!

It may take another 50 years for the current generation of $500k+ portfolio owners to die out completely, but when that happens, one will remember the “tie between investor and advisor” like Jack Waymire remembers the hair on his head. Justifiably, people like Waymire are scared. Wonder who he is trying to reassure with this fall-flat-on-face blog post — his clients, or himself?

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Tom (DIY Investor) said:

April 12, 2014 — 10:04 PM UTC

Wow, two years since this article was written, the comments thread is still going! I think the online investment advice industry has gotten even more competitive. The article title says “Online RIAs will mostly fail” – and the emphasis is on mostly. Conversely, that means some will succeed. It will be interesting to see what the fallout will be in the next year or two.

I think this article in the NY Times “Your Money” blog sums up the situation as it is seen today, almost two years later since this article was posted.

http://www.nytimes.com/2014/04/12/your-money/start-ups-offer-financial-advice-to-people-who-arent-rich.html?ref=your-money&_r=0

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Tom (DIY Investor) said:

March 30, 2014 — 9:39 PM UTC

And my 2 cents … whether online RIAs fail or not, you can’t blame them for trying….

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Tom (DIY Investor) said:

March 30, 2014 — 9:37 PM UTC

Forgot to include the link in previous comment. Here it is.

http://awealthofcommonsense.com/interview-wisebanyan-ceo-herbert-moore/

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Tom (DIY Investor) said:

March 30, 2014 — 9:35 PM UTC

I remember back in November Brian from WiseBanyan commented on this article, so I thought this link featuring an interview with WiseBanyan CEO Herbert Moore would be worth sharing.

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NervousCat said:

March 17, 2014 — 1:39 PM UTC

Jason Zweig has a interesting article about this topic, and the new kid on the block, WiseBanyan.

http://blogs.wsj.com/moneybeat/2014/03/07/the-incredible-shrinking-management-fee/

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Hiral said:

February 24, 2014 — 7:15 PM UTC

Jack – to your point #10, when was the last time a financial advisor did the same? In my experience, financial advisors typically prey on those who actually are in some form of debt and create a 'financial plan’ that essentially shows a big picture of their assets. Additionally, they are all about smooth talking with phrases like “You’re ability to earn income is your number one asset”, which then leads to “let me sell you some disability insurance for income protection”, or better yet, “lets take out a life insurance policy as use that for your kids college education instead of a state sponsored 529 plan”. Goodbye, traditional financial advisors!

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MC said:

January 17, 2014 — 5:39 PM UTC

Since this thread still seems to be live, I’ll comment here, as I’m the exact target market these services are after, and there seems to be a lot of skepticism of why anyone would use these and how this time it’s different. I’m mid 30’s, good whack of money already invested, and fairly knowledgable about investing. I’ve had a Vanguard account for years, and have been doing myself what these services do, which is generally construct a diversified portfolio using low cost ETFs and mutual funds (I don’t consider target date funds appropriate comparison as you don’t get near the range of diversification in those). However, there’s a few things the new services do that would be nice for me to outsource, namely: – Automatically rebalance (transaction fees rolled into their charges) – Perform tax loss harvesting (interestingly, wealthfront has gone to a model where they examine this daily if you have enough invested, which could more than pay for the service from this alone) – Measure and allocate risk of different asset classes

Again, I can do these all myself, but my time has value, and these services are passing the threshold of providing value vs. my time – that’s what’s really changing. As the spate of new services shows, there isn’t a huge barrier to entry here, meaning costs are going to continue to do down over time. In the not too far future it’s going to be only the true penny-pinchers that would do this themselves.

I’ve also talked to some traditional flesh and blood advisors to hear their pitch, and it’s not been overly compelling. Portfolio construction and management is similar to what the online services offer, at 4-8x the cost. I’ve lived through 2000 and 2008, and don’t need anyone to tell me “it’s all going to be OK”, especially for many thousands of dollars a year. No doubt some people do, and a traditional RIA could save them a good amount by not selling low and buying high. Same for putting together a “holistic financial picture”. An afternoon on the internet and some checklists can get you 90% of what a traditional RIA could give you – the knowledge is no longer locked away. Or, if you really need it, pay a fee-only advisor 1k to put it together for you and use an online service for the rest.

If I were a 1% AUM RIA with an aging client base, I’d be very concerned about the future.

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Brooke Southall said:

December 5, 2013 — 11:36 PM UTC

Yep, I’m being a little tongue and cheek. I do think that robo-advisor is a misnomer we all use because it’s fun to say. I’m not sure these are robots or advisors, more like direct-sold money management at a price reflecting all the middlemen cut out yet at a quality that reflects, one hopes, scale.

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Tom (DIY Investor) said:

December 5, 2013 — 11:32 PM UTC

Nearly one and a half years since this op-ed piece was written, the comments continue. I’m just keeping the debate going … history will be the final judge on the robo-advisors.

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Brooke Southall said:

December 5, 2013 — 11:26 PM UTC

Well, the last refuge of all marketing conversations about a product seems to make no marketing sense — is to say it’ll make sense to the millenials.

Brooke

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Tom (DIY Investor) said:

December 5, 2013 — 11:16 PM UTC

Millenials are the generation that might be the game changer for online advice sites.

http://www.theguardian.com/money/us-money-blog/2013/dec/04/online-financial-advice-lower-fee-guide

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Dennis Gibb said:

November 29, 2013 — 4:30 PM UTC

PDXMOM, there are times I wish I could apologize for the actions of the entire industry for putting people through experiences like yours. One of the reasons I left the brokerage side ( who you were talking to) was the terrible way the industry treated people and sadly your case is more typical than atypical.

When I started my firm we made the decision that we would only turn down a customer if we can not provide the services requested or if we can not provide them at a cost the client can afford. Our guide is that we have to be able to improve the client situation far above the fees paid. We always create a plan before we sign the client and the client knows what thy are going to pay before we sign.

I wish you the best in your new relationship and my best wishes and hopes for your special needs child.

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NervousCat said:

November 29, 2013 — 5:17 AM UTC

Thought I’d share this link seen in WSJ (redirected from Google). It’s about online advisors enhancing free online investment services. I figure it may be relevant since the previous comment from the DYI Investor mentioned how he prefers to use the free online services and ignore the advice on specific trades to make.

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&ved=0CDsQqQIwAQ&url=http%3A%2F%2Fonline.wsj.com%2Fnews%2Farticles%2FSB10001424052702303281504579221823444833630&ei=5SCYUqT8H9LooATKqoGgDQ&usg=AFQjCNEZUnOwonjOlefg0LmkFukKqAmBKw&sig2=ljGHpXYuquvP5M4dYeeB8w

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Tom (DYI Investor) said:

November 28, 2013 — 1:07 AM UTC

I’ve tried Jemstep, SigFig, FutureAdvisor, and Personal Capital free online management tools because I have constructed a strategic index fund portfolio that I can manage myself through rebalancing. I have seen the advice from FutureAdvisor and Jemstep, but I dismiss it because their advice would require excessive portfolio turnover from recommended trading actions. I mean, is it normal to see 32 actions in my Jemstep advice plan? When I contacted Jemstep, their answer was that my case was unusual. I’m sure a human could do a better job, but again, I don’t want to pay for that privilege. I don’t use these online advisor sites for advice. I use them for portfolio aggregation because I have retirement and brokerage accounts scattered everywhere, and this is the only way to pull them all together to view my asset allocation (I happen to be spreadsheet illiterate). Some of these sites are great for that, while others offer customized human advice in the form of Skype calls. To each his own. I found an article that include an interesting looking chart of the existing robo-advisor vendors.

http://seicblogs.com/advisor-practice-management/client-service/5-ways-robo-advisors-will-change-the-way-advisors-work/

Here’s a few more related articles I found.

http://www.thestreet.com/story/12106828/1/replacing-financial-advisors-with-robo-advisors.html?cm_ven=RSSFeed

http://blog.wiredadvisor.com/7-ways-financial-advisors-can-thrive-in-the-digital-age/

http://alj.am/1fL51Wt

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Brian Ramirez said:

November 22, 2013 — 11:35 PM UTC

Hi Jim, thank you for requesting a beta invite. We’ve been rolling out our invitations on a first-come basis, and you should be receiving yours soon. We’ve heard similar gripes about other “personalized” online managers. Feel free to give us a call as you’re going through the sign-up process if you have any questions. We’re always happy to talk!

Brian Ramirez
WiseBanyan | Chief Marketing Officer
www.wisebanyan.com

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Brian Ramirez said:

November 22, 2013 — 11:32 PM UTC

Thank you for your feedback and questions, Dennis.

Regarding our asset allocation, we use a cap-weighted model that produces portfolios that appear very similar to a complete MPT strategy. This allows us not to be bound by the efficient frontier and fall into the false assumption that asset class correlations are static and do not move towards 1 during a market downturn. We believe in this approach, because it has been repeatedly proven to produce better long-term results for clients than market timing or active investing.

You are correct that our personalized approach to online investing is a core differentiator when comparing us to traditional advisors or the new wave of passive, online managers. In the short-term, we are able to keep our overhead low through internal efficiencies and focusing solely on our clients’ portfolios. As we scale, we will introduce a few higher margin products/services that complement our current offering while staying true to the ethos we’ve established with WiseBanyan (fully transparent, aligned client/advisor interests, automated/simplified processes). However, we plan to stay focused on our core competency of investing in order not to get stretched too thin. Thanks again for your questions!

Brian Ramirez
WiseBanyan | Chief Marketing Officer
www.wisebanyan.com

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Dennis Gibb said:

November 19, 2013 — 12:22 AM UTC

Brian, I looked at your site and it seems interesting and I was also taken by the seeming availablity of the people to answer questions. There are several things I wonder about. The first is diversification what is the modality for the asset allocation if it is just mpt then there is nothing new here. Second you advertise low costs but if you are going to expand your personnel to handle the questions ( which get more complex overtime) then the overhead of the firm must rise. It will also be driven up as you are requested to deploy more products or investment solutions which is exactly the situation the brokerage houses found themselves in a few years back.

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Jim Steinberg said:

November 14, 2013 — 10:14 PM UTC

Brian,

Thanks for inviting me to WiseBanyan. I like that you guys provide the automation but also seems like there are real people sitting there ready to help. I read about Betterment before, and this article points out a few other services. My concern was always that I wanted somebody I could talk to even if I just had questions about my account. I called Betterment and just got a generic customer service rep who couldn’t really answer many questions, so I decided to hold off. Maybe they were just going through growing pains, but it was enough to make me hesitate.

I signed up for a Beta invite on your site. Look forward to hearing from you guys.

-Jim

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Brian Ramirez said:

November 6, 2013 — 8:43 PM UTC

I just came across this article, and have been enjoying everyone’s insightful comments and points of view. In general, I’m glad to see that there is an appreciation for the automation and simplicity that the Internet can bring to the more mundane processes in investing, but that there is an equally strong appreciation for the personal connection and trust built between a financial advisor and their clients.

I’d like to invite you all to visit www.wisebanyan.com and let me know your thoughts on our approach to financial advisory. Essentially, we’ve removed all the annoying parts of traditional investing and added updates to the good ones. Our clients receive the ease of a fully managed portfolio (including automated rebalancing and deposits), one low flat fee, full transparency, and are paired with a financial expert.

We agree that while this is an industry that is in need of disruption, a client’s experience doesn’t have to be “appified” in order to accomplish this. We like to say we provide the perfect mix of personal attention and investment technology. Again, I’d love to hear your thoughts! Thanks.

- Brian Ramirez

WiseBanyan | Chief Marketing Officer
www.wisebanyan.com

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CA said:

October 27, 2013 — 6:42 PM UTC

Is it just me that is not seeing the value of having a full service financial advisor. I have tracked my earning over the years and it is less than what I would have earned if I would have just used a discount broker and invested in simple ETF’s. At the advice of my broker or by automatic asset allocation my portfolios are stacked with loaded mutual funds and high fees. Like most working stiffs, my area of expertise and interest is not portfolio management. So I’ve farmed that out to an expert. Lately I’ve been questioning that decision, but since I fall short on expertise and interest I have not committed to the DIY method. I’m seriously considering using an online portfolio manager like FutureAdvisor or Jem Step. One of my hesitations is that there seems to be an online opinion that theses managers are best suited to for portfolios less than 500K. I have not heard a good reason this, if there is, I’d love to hear it.

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NervousCat said:

September 8, 2013 — 12:58 PM UTC

Another article – interesting how it is described as a wave of online services.

http://www.financial-planning.com/news/advisor-threat-wave-of-new-online-services-incoming-2686404-1.html

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Tom (DYI Investor) said:

September 6, 2013 — 2:03 PM UTC

I’ve tried several of the products mentioned in that WSJ article, but I haven’t subscribed to any of them. The biggest challenge these startups have is convincing folks like me that the premium services are worth a fee subscription

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NervousCat said:

September 6, 2013 — 1:55 PM UTC

Here’s a WSJ article with a good comprehensive overview of all the online RIAs (even though some like SigFig may not necessarily fall into this category).

http://online.wsj.com/article/SB10001424127887323477604578654101591319918.html?mod=WSJ_JRWealthMgnt_3_3_LEFT

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Dennis Gibb said:

August 28, 2013 — 1:55 PM UTC

Marie, First I congratulate you on your success you seem to have come to a self awareness of who you are and what you want and don’t want. That is the first step to successful investment.

I recently passed my 40th year in the business and there are few harder critics of the business than me. I have seen the worst advisors and brokers can do and I have seen the best. There are a lot of good- no great- people in this business. The good ones understand that they are servants of their clients but also leaders in areas of expertise that might not be available to the client. Are we perfec.t no and never will be we are affected by the same forces as others but the good advisors have over time become aware of their own bias and have taken measures to control them.

There are lots of great advisors who can show you audited track records going back decades we for example make it a point to tell our clients how we did in the times of greatest stress because that is when an advisor earns their keep. Kipling said 'if you can keep your head when all about you are losing theirs and blaming it on you’ and that is what a good advisor does.

In so saying, that records exist does not mean those records are germane to your situation. We for example do not bench mark our clients to indices we benchmark them to their needs and what they need to accomplish to reach their goals. We try constantly to find the lowest risk way of doing things and that often means lower returns but we would rather have consistent lower returns than volitile higher returns.

Value in advise is a relative thing. What do you want done? What are you willing to do to get it done, are you just going to dump the whole thing on an advisor and then sit back? Is just getting the mulitple strings of a person’s life in order and working toward a goal valuable- to a lot of folks it is. Is beating the SP 500 every year the goal? Not every advisor is going to deliver value to every client and not every client needs an advisor. You need to determine if you want an advisor or a consultant who you can bounce ideas off at various times or do you need a person to execute trades? Value is determined by the satisfaction of needs, and the more clearly you define your needs the easier you will determine if value is being delivered.

As far as fees are concerned remember that fees are a minor portion of the equation and concerntration on fees is the surest way not to find value.

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Marie said:

August 28, 2013 — 1:20 PM UTC

I am very interested in online financial planning. I live in a town where 30 people that I know have gone into real estate sales or “wealth management” in the past few years (one
'wealth manager” changed careers after expanding his business in 2004 and going bankrupt in 2008). No one can show you a track record but they all want a % of the money that we have saved. For what? I am not looking for a friend or a free seminar with a steak dinner. 1% of my savings is a lot of money. Even though I do not write a check for the fees I will still be out a lot of money.

I want value for my hard earned savings. I also do not want someone who will sell me whatever their company is pushing. I know that the recent financial crisis uncovered a lot of scams and dishonest financial service providers – I know that you are shocked. I just do not trust financial advisors. I need to be in control.

Who among you can show me a track record through the financial crisis? How much did you lose 2007 – 2009? I lost about 10% but I got back in and have reaped the benefits of the overall stock market increase over the last few years. How would a financial advisor have helped me?

Win me over. What could a financial advisor/planner/wealth advisor do my 1.5m portfolio and what would it cost me?

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NervousCat said:

July 26, 2013 — 2:34 PM UTC

LearnVest is taking a more comprehensive approach to online advice according to this New York Times article.

http://www.nytimes.com/2013/07/27/your-money/financial-planners/aiming-to-bring-financial-planning-to-the-masses.html

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Tom (DYI Investor) said:

May 9, 2013 — 1:46 PM UTC

I hate to add to the link spam, but these article were also very interesting concerning DYI investing and online advisors.

http://www.reuters.com/article/2013/04/11/column-miller-investing-idUSL2N0CY1BT20130411

http://online.wsj.com/article/SB10001424127887323741004578418611242496832.html

And one more from the Bucks Blog about 401(k) Plans (where most middle class folks save).

http://bucks.blogs.nytimes.com/2013/05/06/the-dull-task-of-decoding-401k-fees-matters/

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NervousCat said:

May 8, 2013 — 7:55 PM UTC

Here’s an interesting link to a story that might add to this discussion.

http://www.advisorperspectives.com/newsletters13/The_Most_Underappreciated_Threat_to_the_Advisory_Business.php

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Dennis gibb said:

May 8, 2013 — 7:41 PM UTC

Mark Twain once had an operation and the doctor sent him a bill for a thousand dollars. Twain asked why so much? The doctor replied “ it was a dollar for the operation and nine hundred ninety nine for knowing how to do it” At some point all the nuances that accompany wealth drive investors to personal service. While technology will make the job easier it will still be hard to call your computer on the phone during a 2008, 2002, 1999, 1987 et al and be reassured and even cynical young people who are fee conscious get scared.

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Tom (DYI Investor) said:

March 21, 2013 — 7:11 PM UTC

Another article about Jemstep.

http://go.bloomberg.com/tech-deals/2013-03-19-why-you-should-consider-taking-financial-advice-from-a-computer/

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Tom (DYI Investor) said:

February 26, 2013 — 4:30 PM UTC

Here’s another review I found of the “new” Jemstep site on MarketWatch.

http://www.marketwatch.com/story/be-your-own-financial-adviser-2013-02-26

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NervousCat said:

February 19, 2013 — 5:11 PM UTC

By the way, what do you think of the new e-Trade commercials?

http://thechicagofinancialplanner.com/2013/02/18/etrade-commercials/

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NervousCat said:

February 19, 2013 — 5:08 PM UTC

The new jemstep.com site is now advertising itself as a portfolio manager, not an advisement site.

http://blog.jemstep.com/2013/01/portfolio-manager-helps-you-lock-in-more-money-for-retirement/

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Fred said:

January 13, 2013 — 6:25 AM UTC

The hybrid model is the future. Combine the automation platforms similar to these robo-advisors you mentioned in this article with real life advisors who can meet clients virtually and locally face-to-face. NestWise.com (Fee-only RIA owned by LPL) is the only firm really doing this and successfully targeting the middle market. Read this article: http://www.businessweek.com/articles/2012-12-20/financial-planners-online-vs-dot-brick-and-mortar

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Michael Kitces said:

December 16, 2012 — 3:33 PM UTC

Even the Finovate review continues to make the clear, blatant point that these services are not delivering robo-advising. They’re delivering robo-portfolio-construction, that’s it. Where’s the discussion of cash flow issues? Insurance needs? Distribution of assets after death? Retirement needs and income sustainability? Tax planning? All the basic and standard tools taught in an introductory level financial planning class?

The reality is that these services continue to do little more than automate portfolio construction. While that is a useful service for a segment of investors, it’s also not new – such tools have been available for more than a decade (albeit with varying degrees of quality) from Schwab, Fidelity, TDAmeritrade, E-Trade, and a host of more. Even Vanguard provides these kinds of tools. They all provide asset allocation tools, they all provide risk tolerance tools, they all provide information to guide the do-it-yourself investor to select the correct type of portfolio based on risk tolerance.

Simply put, there continues to be little new here beyond an iteration of what mega retail brokerage firms have been doing since the late 1990s. And it’s certainly not competition for comprehensive financial planners, as investments are only a small slice of true advising (and ironically, for the segment of the population these services are pursuing, not even the largest slice of advising for that group).

So if you want to see great “robo-advisors” there are plenty of examples of mega firms that already do this. But notably, even THEY realize they’re not fighting against advisors, which is why Schwab, Fidelity, TDAmeritrade, and even Vanguard (advisors.vanguard.com) all work proactively hand-in-hand WITH advisors to generate business. Because advisors are referral sources for these platforms, not competition.

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Tom (DYI Investor) said:

December 16, 2012 — 5:32 AM UTC

I came across this article in a Google Search. I read through the article but the comments section proved more interesting. There seems to be a heated debate on this subject of robo-advisors, and one comment that links to Bo Lu’s rebuttal seems to have touched a hot button. While that rebuttal may have come off as antagonistic and insulting to RIAs, that does not appear to be the case in this video interview I found on YouTube featuring Bo Lu (maybe because he’s got his salesman hat on).

http://www.youtube.com/watch?v=LJ2IF7xOgko

I also came across another review of FutureAdvisor in finnovate.com.

http://finovate.com/2012/12/futureadvisor-brings-a-personalized-touch-to-do-it-yourself-financial-planning.html

The jury is still out on whether these startups that develop robo-advisors will actually make money on them, but you certainly can’t ignore this trend, especially when venture capitalists keep pouring investments into them. I guess we’ll know if this market matures in a few years.

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NervousCat said:

November 22, 2012 — 12:45 PM UTC

Here’s a related article I found that is worth sharing.

http://www.financial-planning.com/fp_issues/2012_8/can-computerized-investment-guidance-replace-planners-2679984-1.html

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Brooke Southall said:

November 21, 2012 — 7:48 PM UTC

Appreciate the heads up….

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NervousCat said:

November 21, 2012 — 2:42 PM UTC

Some news about WealthFront hiring a well known person in the industry as their CIO.

http://www.indexuniverse.com/hot-topics/15200-malkiel-named-cio-of-online-etf-only-ria.html

Will name recognition increase chances of survival?

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NervousCat said:

November 8, 2012 — 12:58 PM UTC

Well that explains why I’ve heard some reviewers who tried their software refer to SigFig as “Mint for Investors”. I’ve tried FutureAdvisor, JemStep and SigFig, and I personally think SIgFig is the best of them all, even if it is in a different category. SigFig did provide me with the following regarding my portfolio:

1) Brokerage Referrals – Move my holdings to a brokerage that offers cheaper transaction fees
2) RIA Referrals – Displays a selected list of participating advisers and offers to schedule portfolio review
3) Mutual fund advice – Classified one of my mutual funds as a “mediocre investment” and shows me three alternative funds they recommend in a side by side comparison

Therefore, I think SIgFig takes more of a hybrid approach with their software and online web site.

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Michael Kitces said:

November 5, 2012 — 2:40 AM UTC

SigFig barely qualifies in the “online RIA” category. They don’t manage money at all. Their RIA status is simply a regulatory requirement for them to get the revenue-sharing fees they take on the back end from the actual RIAs they refer people to.

Accordingly, it’s not surprising that SigFig is less antagonistic about advisors, as the primary way they apparently make money is getting paid BY advisors and their revenue-sharing fees! ;)

But overall, SigFig is closer to a Mint service that also generates online leads for advisors/money managers/etc. and takes a revenue-share, than really falling into a true “online RIA” category.

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NervousCat said:

November 4, 2012 — 1:32 PM UTC

SigFig mobile link here:

https://www.sigfig.com/mobile

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NervousCat said:

October 16, 2012 — 1:10 PM UTC

Correction … Mint is a personal finance management tool, not a portfolio management tool.

http://www.mybanktracker.com/finance-tool-reviews/Mint

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NervousCat said:

October 16, 2012 — 11:50 AM UTC

I noticed that mint.com is not one of the online financial advisor sites that could fail, probably because Mint is a online portfolio management tool and does not give advice online. Anyway, check out these stories in the Mint.com blogs.

http://www.mint.com/blog/investing/are-portfolio-management-apps-right-for-you-012012/

http://www.mint.com/blog/investing/futureadvisor-a-review-of-the-latest-portfolio-analysis-tool-032012/

Personally, I like the idea of portfolio management software that does not give advice. I’m more interested in seeing all my accounts in one place since mine are scattered everywhere. I predict this online model will succeed. I know someone who has been using Mint for many years.

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Lex Sokolin said:

October 15, 2012 — 4:59 PM UTC

Michael — I agree with your positioning of the issues. The online model would be more successful if integrated into the existing market and workflow of financial advisors. I think there’s real value to be created both for consumers (getting access) and advisors (scaling their business). I’d love to chat more about this if you’re open (lex @ nesteggwealth.com).

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Michael Kitces said:

October 14, 2012 — 6:35 PM UTC

Actually, online/virtual advice offerings for 401(k) participants is hardly new either. MyFinancialAdvice.com was trying to support this 10 years ago. BoulevardR.com had a completely new version 5 years ago. Others are out there too. None have had any material impact on the marketplace yet, and most ultimately hire or work with advisors, not compete against them.

It would truly be nice to see some offerings of this nature succeed, as the need is clearly there. But they’re not new, most have failed or had very limited success, and most ultimately find that advisors are allies and the competition is other do-it-yourself platforms.

Personally, I just find sad that platforms with interesting potential choose to say idiotic things that antagonizes potential allies for their business because they don’t even understand who their marketplace and competition really is. Great entrepreneurs know that part of what it takes to be successful is LISTENING To the marketplace, not just making brash and ignorant statements about it.
-Michael

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NervousCat said:

October 14, 2012 — 6:25 PM UTC

All your points are valid, and perhaps the ones who will get the most use of these sites are the Techs. Howver, Future Advisor is doing something the other online advisors haven’t tried – online 401k advice.

https://www.futureadvisor.com/401k

I know someone who just signed up with futureadvisor.com premium service just because he discovered what a mess his 401k has become over the years and he needs to make some sweeping changes to his 401k portfolio. I don’t believe these online advisor sites are in direct competition with you. This is more about educating the general public about the poor choices they’ve made in 401k Plans (actively managed funds with really high expense ratios). I predict most people who sign up for a Future Advisor account will be those who want improve their chances of better 401k returns (that’s why I signed up). If I win the lottery, then I would think about hiring a financial advisor with RIA certification, but the average person has no need to hire one if their only investing is from a 401k with under $100,000 savings in it. This is where the online sites come in to help those who are clueless at picking funds in their 401k Plans.

I do believe the best place for novice investors is not from one of these newfangled online advisor sites, but from a site called bogleheads.org. This is a discussion forum where people can learn, contribute and participate in discussions – not to mention a teriffic wiki for reference on investing basics, asset allocation and more. Personally I am not impressed with futureadvisor.com for advice (their advice to me was to sell off most of my Vanguard index mutual funds and replace them with Vanguard and Schwab low cost ETFs), so I think I will stick to being a do-it-yourselfer and keep learning from bogleheads.org. There’s nothing like communicating with like minded investors who share a boglehead philosophy of buy-hold-rebalance with low cost index mutual funds.

Overall, I tend to agree with most of what you said in your article, but most people who discover these online advisor sites are not exactly looking to use them as a replacement for a human financial advisor. They are do-it-yourselfers who want to remain do-it-yourselfers and see the software as yet another tool that can help them, similar to the resources at the bogleheads.org site.

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Michael Kitces said:

October 14, 2012 — 2:43 PM UTC

NervousCat,
Yes, I realize the TECH industry is excited about the idea of a tech company delivering financial advice. But the TechCrunch and other tech industry articles have been all hype and no results.

Bo Lu’s response article on Forbes shares a similar ignorance of the marketplace. Their platforms are not even in competition with financial advisors in the first place. They’re in competition with platforms like Vanguard, and existing online do-it-yourself platforms like Schwab and E-Trade.

The idea of cutting out the advisor is 40 years old. The idea of implementing investments on a online platform is 15 years old. I see remarkably little that’s original or effective in what most of these “new” online platforms are doing. They’re competing with established mega-brands, in a segment where “brand” has been shown to matter, a lot, for creating trust with do-it-yourselfers. And ultimately, virtually all of these platforms are competing for do-it-yourselfers – which, again, is why they’re not actually competition in the first place.

The irony, however, is that Vanguard, Schwab, and other similar platforms long ago realized that there are actually opportunities to work WITH advisors proactively, because they’re not actually competition in the first place. It’s only these new companies that don’t even understand the marketplace they’re in, throwing barbs at advisors who would more likely be allies than competition, and ignoring their REAL competition. – Michael

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NervousCat said:

October 14, 2012 — 2:16 AM UTC

In case you missed it, I found a rebuttal from the founder of FutureAdvisor.com:

http://www.forbes.com/sites/ciocentral/2012/05/07/no-you-dont-actually-need-to-hire-a-financial-advisor/

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NervousCat said:

October 14, 2012 — 2:09 AM UTC

This article seems to have a different opinion.

http://techcrunch.com/2012/06/17/thankfully-software-is-eating-the-personal-investing-world/

RIA’s need to become more competitive. Charge a 0.25% fee like Portfolio Solutions or Wealthfront. Also lower your expectations – most RIAs won’t even consider a client with less than a half million dollars.

Software is aiding do-it-yourself investors and filling a niche. FutureAdvisor, JemStep, etc. are good things if they can educate the masses. But when considering someone to manage your money … caveat emptor … whether it is a human being or a financial algorithm on a server.

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Lex Sokolin said:

July 18, 2012 — 4:57 PM UTC

Hi Michael,

You are completely right that there has to be real value. In my view, if a website just makes you pick one of three pre-built models, there is not much difference between that and a retirement fund. The problem with the retirement funds and the pre-build models is that they are not customized, and the online RIA’s value should be to (1) get the behavioral and financial profile of the client, (2) apply robust analytical rules to generate a portfolio allocation, (3) show analytics that include future simulations and backtesting, (4) facilitate the right judgment call, (5) implement the portfolio in a quick, seamless way and (6) provide the client a way to see their investments any time, on demand, on any device. Portfolio rebalancing and communication should be part of that feature set.

In other words, it is possible to generate an actually customizable, intelligent experience for the customer online. Yes, a 60-40 on Vanguard is a feasible solution, but that can apply to any wealth management client. I like the idea of empowering FAs to take their sophisticated investment advisory and financial planning logic, quantifying it into a user-friendly well designed system, and giving the market another channel through which to interact. The advisor is only as hands off as they like, and this can be used as a lead gen tool as well.

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Michael Kitces said:

July 18, 2012 — 4:43 PM UTC

Lex,
What’s the difference between being an “online RIA” and just investing direct with Vanguard and their index funds and ETFs, aside from the online RIA scraping an extra fee to deliver the same value to the consumer that Vanguard already does?

If the firm is active, I get the value. If the firm delivers human touch, I get the value. If the firm delivers extensive financial planning advice beyond just the portfolio, I get the value.

If the firm just creates the same autopilot passive ETF portfolio and the consumer doesn’t get a human advisor, why not just go direct to a low cost provider that does the same thing for less?

I’m not sure I’d want to bet my business model on whether or not Vanguard will launch a slightly better online interface that instantly puts me out of business! – Michael

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Lex Sokolin said:

July 18, 2012 — 4:11 PM UTC

I am not sure that the positioning should be so black and white. Online RIAs are here to stay, and their business model works because there is a subset of people for whom the autopilot passive ETF portfolio is the right product. You can expect these businesses to grow features that are missing, and slowly bridge the gap towards the traditional business.

While online RIAs may not displace traditional RIAs in the short term, I believe an automated online offering with information, analytics and advice at the fingertips of the client will be standard across all business models. The value-add of a well designed interface across devices is the equivalent of a high quality office or a client conference/dinner for the web generation.

This is why my company NestEgg (www.nesteggfintech.com, www.nesteggwealth.com) works with financial advisors to white label for them online RIA offerings based on their investment philosophies. People have different points of view on how to build a portfolio, etc., and an automated online offering is an additional distribution channel — a way to bridge existing business to younger clients and scale efficiently.

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Brooke Southall said:

May 25, 2012 — 5:59 PM UTC

Hi Ann,

At some point, we’d like to bring our readers up to greater speed with what you’re up to. It sounds interesting.

Brooke

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Ann Hynek said:

May 24, 2012 — 10:53 PM UTC

At the risk of repeating the assertion made by Michael Kitces, I must clarify that Personal Capital is most certainly a full-service RIA. Our expert team of accomplished advisors are actively serving our clients. They provide uniquely personalized financial advice through services previously only available to extremely wealthy investors. This is in addition to our free money management tools conveniently available online and via mobile applications.

Thank you.

Ann Hynek
Marketing Communications Manager
Personal Capital
Redwood City, CA

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HS said:

May 24, 2012 — 7:32 PM UTC

I would agree that technology can effectively be scaled and deployed to engage a large part of the population left on the side lines by the % AUM model followed by traditional advisors. Unfortunately, I also find the value proposition for the services mentioned (Wealthfront, Betterment, FutureAdvisor) to be weak: if one is to be boxed into a passive allocation essentially following a glide path, they have to make a case for why I would want to give them a few basis points as opposed to simply putting my money into a target-date fund. And they seem to be disclosing very little information so far regarding their allocations’ risk and returns, and how they generate value. I do not think people care about cost if they find value.

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Brooke Southall said:

May 24, 2012 — 6:40 PM UTC

Thanks Michael and Ben for these remarks. I might add that my conversations on and off the record with the heads of these websites have one common theme that they must take heart from: despite low absolute balances of managed assets, their growth rates are strong. Of course we’ll be watching to see if they can keep it up and whether opportunities for RIA coopetition emerge.

Brooke

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Ben said:

May 24, 2012 — 12:10 PM UTC

These platforms are the future and like it or not, the next generation is very skeptical about so called experts and are extremely fee conscious. They will gravitate to whatever is the cheapest as long as it does a good job. The author is really missing the point. Many of these online companies do not claim to have a magic formula that always beats the market. Most simply use modern portfolio theory to create a diversified portfolio using low cost etfs and index funds. I work in a private bank and I see a wide range of fee structures from money managers and advisors, but I have seen no correlation between performance and price. Additionally, I think this is a great opportunity for the 5k-100k crowd to have their money managed by an investment advisor who would generally want to avoid lower end accounts.

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Maria Marsala said:

May 24, 2012 — 4:11 AM UTC

Well, I remember the time when trading using a computer, I think it was the NASDQ at the time, seemed pretty “pie in the sky”. Now, an entire generation has been brought up to “trust” the INTERNET — rightfully or wrongfully. So on the issue of online banks or financial advisors, I’ll keep an open mind to what the future will bring.

Brooke, I agree about those laundromats. Moons ago I worked in one for extra money after my day job. The same work, over and over again, and behind and under those machines, it’s not a pretty sight!

Jack, I agree that right now may not be the best time for companies who are only online. Be they FAs, Insurance Brokers, or Accountants.

Boy, I hope we don’t become a world where people don’t meet people any longer. What a boring and depressing thought.

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Michael Kitces said:

May 24, 2012 — 4:09 AM UTC

I agree with most of Jack’s comments here, and in fact have expressed similar skepticism in my own blog at http://www.kitces.com/blog/archives/324-Technology-Will-Improve-Financial-Planning-And-Augment-Planners,-But-It-Wont-Replace-Them.html

However, it’s worth noting that there are some dramatic differences between the platforms that Jack mentions here. Betterment is a purely online format for portfolio construction only using a basic asset allocation. Personal Capital is a fully engaged advisor service that just happens to work with clients anywhere because they are capable of conducting meetings virtually. The point being, some of these businesses actually use advisors as much as traditional planning firms do, just in different formats.

Just a word of caution not to paint “online RIAs” with too broad a brush. There are some VERY different business models engaging in this space, and many are closer to traditional advisory models than most realize.

Respectfully, – Michael Kitces
Publisher, The Kitces Report, www.kitces.com
Blogger, Nerd’s Eye View, www.kitces.com/blog
Partner, Director of Research, Pinnacle Advisory Group, www.pinnacleadvisory.com


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