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What exactly are robo-advisors, why did they steal the 2014 show and what will a 2015 repeat take?

We're talking 500 people, $250 million in capital with identifiable characteristics and 5,000 nervous legacy providers

Author Brooke Southall January 2, 2015 at 5:36 PM
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Wealthfront is the robo-advisor most associated with the term -- and with the founder, Andy Rachleff, who hates it most.




Grant Barger

Grant Barger

January 2, 2015 — 10:26 PM

Great article, Brooke…
The transparency of the robo-advice solution will be it’s own undoing…
Just as the paradox of the macro-version of this conundrum has always existed within the industry… Client interest versus shareholder interest… Even the highly publicized Goldman Sachs rules of engagement tells us the story openly of how shareholder interest usurps client interest (even when the clients happen to be shareholders) In the case of the Robo model… the shareholders are the VCs who make the Robo-venture possible… and they are the crowd who are used to seeing returns… The investor/client will continue to be the bait as a means to an end with this antiquated “Top-Down” wall street/silicon valley model. But the digital rope that consists of time, tools (technology) and knowledge will ultimately be the undoing of the “system” when it is paired appropriately with industry wisdom.
With the digital transparency that will be availed by the Robo model itself, the investor/client will demand the right to become the focus/endgame of the business model… cyclical bull markets have often washed away the need for serious contemplation of a “client-centered” bottom-up model in which the best interest of the investor/client is the end-game by which the value is then transcended up the model to shareholder value in a win-win-win scenario. (investor-advisor/enterprise-shareholder)
It’s about time…
This is the greatest time in the history of investment advice to be or become a serious steward of wealth… it is just a matter of timing… because to be right too early is the same as being wrong… I am anticipating a longer lead time on the next major bull cycle which will create the right set of circumstances for the investor/client to discover the greatest investing opportunity in history… which entails leveraging an advisor who understands his or her absolute value and pairing that advisor with the technology that provides the absolute transparency needed to hold the advisor and the industry accountable. In essence, the transparency offered by ROBO- technology will enable the investor/client to demand the bottom-up model they so readily deserve…These are the best of times for investor/clients and client-centered advisors who truly understand their absolute value.

Thanks, Brooke…


Stephen Winks

Stephen Winks

January 6, 2015 — 10:32 PM

“Robo Advice” is the collision of the financial services industry, where brokers are neither responsible nor accountable on an ongoing basis for their recommendations, with the reality of modernity. Today a broad range of investment and administrative values can be addressed and managed, which is in violation of the internal compliance protocol of the US brokerage industry which does not acknowledge or support advice being rendered by its brokers. . The industry avoids fiduciary liability and responsibility but can not support the continuous comprehensive counsel required by statute of advisors to act in the best interest of all investors.

“Robo Advice” is essential for anyone who hopes to act in their clients best interest and attain professional standing—the ultimate differentiator of financial services professionals as it enables the advisor to go beyond the human three dimensional limitation to reason. [Managing six values (risk, return, tax efficiency, liquidity, cost structure, time) in real time for 500 hundred clients, utilizing 10,000 investment options each having at least 100 description points translates into a 3 billion dimensional equation (9 quintillion possible outcomes-18 zeros) if one is to add value is not humanly possible. But it is manageable today through (a) prudent authenticated investment process in support of (b) expert fiduciary standing defined by statute, (c) advanced technology and (d) more modern approaches to portfolio construction, which is (faster, better and cheaper and more lucrative in advisor compensation) irrefutably a better business model for the consumer and the advisor. This type of “Robo Advice”, not possible in a brokerage business model, can advance modernity and professional standing..

The question is can the brokerage industry reconcile the distinction between “retail investors” (who need to most help) and all other investors (that the brokerage industry hides behind in its suitability business model), and if so, can it adapt to a faster, better cheaper fiduciary model build around advanced technology and a simplifying prudent investment process and a more modern approach to portfolio construction? . None of the Robo applications cited have matured to this level of expert authenticated (by statute) advice but it will emerge in the absence of brokerage innovation..

Thus, “Robo Advice” is transformative but not as it exists today. This requires leadership which is presently not possible in a brokerage format nor supported by regulators, which are still acting in their former roles as brokerage industry trade associations, not protectors of the best interest of public trust and confidence. If we can not rely on the industry and its regulators to support the trust and confidence of the investing public, we must look for entirely new firms to emerge like Fiduciary Advisor Advocates (FAA) which are “all-in” in its support of fiduciary standing without conflicted trading desks and compliance protocol. The free market (the consumer and the advisor) will determine whether it prefers the consumer’s best interest being served rather than a broker’s broker dealer’s best interest being served

Since Adam Smith Introduced the “invisible hand” there has never been a case in a free market (since 1776) that the best interest of the consumer has not prevailed. The free market will reliably purvey the solution.

This of course requires “all in” advisory services leadership which is not in a broker/dealer’s DNA.. Recent SIFMA executives celebrated they denying of “retail investors” the same consumer protections accorded to all other investors. This troubling fact does not bode well for broker/dealers but makes professional standing a significant barrier to entry to the brokerage industry being serious competitors in advisory services.

Free market entrepreneurs will provide the scale, expert authenticated prudent processes, modern approaches to portfolio construction, and better advisor compensation models. Yet, there are no “Robo Advice” vendors structured to support expert authenticated fiduciary counsel and professional standing of expert individualized advice which is required. Because “Robo Advisos’ can do things not presently possible in a brokerage business model doesn’t mean they will, yet they are good candidates to support expert authenticated advice—the holy grail in advisory services. Let’ see what happens.


January 7, 2015 — 5:39 PM


Christian Thwaites

Christian Thwaites

January 9, 2015 — 6:16 PM

The “robo-advisors” cling to one fallacy of wealth management: the fee structure.

Any AUM fee provides more income to the advisor as assets increase. Account growth equals more fees. But work does not increase as assets rise. Quite the opposite. Take much-hated ATM fees. A non-participating bank will charge, say, $2.00 to make a withdrawal on $20 or $200. It’s the same cost regardless of amount. Clients understand the pricing. They will, correctly, question why they pay $25 for a $10,000 account and $2,500 for a $1m account. The services and functions are identical.

Until the disruptors change the pricing mechanism, all they’re doing is automating traditional business models.

brooke southall

brooke southall

January 9, 2015 — 6:36 PM

Grant, Steve, Christian,

Thank you for writing such thoughtful comments. They really add to the conversation.

Christian, Your thought is a mind-bender of sorts. Wouldn’t the counter to that be that though more work isn’t done
per se that more value is added. The robo or classic manager assumes increased responsibility, generates more returns and arguably deals with greater complications and transactions costs as asset levels rise? It certainly isn’t a linear relationship between fee and value added but … it still may be the most elegant, so to speak, way to price these services.


Christian Thwaites

Christian Thwaites

January 9, 2015 — 8:36 PM

Hi Brooke

“... it still may be the most elegant, so to speak, way to price these services.”

Yes, I agree that complications that may arise. Perhaps a better, less radical, pricing proposition is to have steeper break points so that the $1m account does not pay 100x the $10k account but something that reflects the changing work. Another RIA practice I have seen is to charge more for service needs. Some clients needs more handholding, and more complex reviews than others. If I’m a once a year guy with a simple taxable account, I may need less advice and care than multiple family account, trusts, IRA account holders.

Just a thought….

also above, re Andy: ...“has attracted $129.5 million in five rounds from 33 Investors — $64 billion in October alone”. Billion?



June 5, 2015 — 11:54 PM

Robo-advisors and traditional financial advisors do not necessarily have to be at odds with each other. Hedgeable, a robo-advisor that focuses on risk management, actively looks to partner with advisors and financial planners. More info here: https://www.hedgeable.com/partner

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Mentioned in this article:

TD Ameritrade
Asset Custodian
Top Executive: Tom Nally

Portfolio Management System
Top Executive: Andy Rachleff

Betterment, LLC
Financial Planning Software
Top Executive: Jon Stein

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