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  • Home>Practice Management>Technology>How to Overcome the Threat Posed by Automated Investment Advice

    How to Overcome the Threat Posed by Automated Investment Advice

    New tools and competitors are forcing advisors to more clearly define the value they provide to clients.

    Ben Brown, 08/24/2017

    Since the 2008 financial crisis, multiple innovative technology companies have been challenging the investment advisory status quo with direct-to-consumer automated investment services, typically for a price much lower than traditional investment advisors. Not surprisingly, the initial growth of these companies and the assets they manage, combined with the launch of automated offerings from established firms like Vanguard, has fueled significant concern among advisors. And it wasn't too long ago that many industry pundits were hailing automated or robo-advisors as the future of investment management--and the end of traditional human financial advice as we know it. 

    Yet the evolution of these automated services over the past five years--both in terms of the breadth of their varied fee and advice models, as well as their growth with regard to total assets managed-- indicates they've become less of a pure threat to traditional human investment advice. Instead, they represent the continued emergence of disruptive technology within the financial services industry that forces advisors to both adopt new technologies and clearly define the value they provide to clients above and beyond simple asset allocation.

    The Current Automated Advice Landscape
    While the rhetoric surrounding automated advice typically pits software versus human advisors, the line between robo-advisors and traditional human advisors is becoming increasingly blurred, as automated services incorporate more human advice and traditional advisors adopt new technologies. 

    On the pure robo-advisor end of the scale stand companies like Wealthfront, charging an annual fee of only 0.25% of assets managed. Betterment, Wealthfront's largest competitor, charges the same 0.25% AUM fee for their basic service, while also offering a "premium" service model for a 0.40% fee (and $100,000 account minimum) that provides investors with access to a human investment advisor. Smaller players such as FutureAdvisor, SigFig, Canadian startup Wealthsimple, and others all charge similar or higher fees with varying levels of access to human financial advice depending on the fee, investor account size, or both. The focus for companies on this end of the advice scale is typically a technology-first approach to investment advice, with limited or no human interaction.

    Bridging the gap between these primarily automated solutions and more traditional human advisors are companies like Personal Capital and Vanguard's Personal Advisor Services. While still relying on cutting-edge technology and an online experience, these "hybrid" advisors emphasize a personal relationship with an investment advisor and the importance of creating a financial plan just as much (if not more) than they emphasize the power of their technology. Though their levels of service, breadth of advice, and fees vary (from Personal Capital's tiered fee starting at 0.89% of assets managed to Vanguard's rock-bottom fee of only 0.30% of assets managed), these services represent much more of a direct challenge to the traditional investment advisor given that they are mass-market "technology-first" advisors as opposed to pure robo-advisors.

    Lastly, and perhaps in their own category of automated advice, are B2B technology companies catering specifically to traditional advisors by creating tools that allow them to harness some of the same automation powers of direct-to-consumer robo-advisors. Often less well-known due to their substantially smaller marketing budgets (given that they aren't usually competing directly for consumer assets), companies like RobustWealth, NextCapital, and others are creating innovative ways for large, established industry players and even solo advisors to automate and/or improve their investment management operations, typically for a low, asset-based fee. Even Betterment, which began as a pure direct-to-consumer robo-advisor, offers its own institutional platform (Betterment for Advisors).

    The Commoditization of Investment Advice?
    Though it remains to be seen if primarily direct-to-consumer robo-advice companies like Wealthfront and Betterment can achieve sustainable growth and profitability, the evolution of automated advice platforms over the past five years presents us with a simple truth: the basic aspects of traditional investment management such as asset allocation, security selection, and portfolio rebalancing are being (or have already been) commoditized by software. Further, the fee level on which these technology companies and platforms have converged for these services is roughly 0.25%, which is significantly less than the traditional investment advisor AUM fee.

    Notable, however, is the success of hybrid solutions that are combining human advisors with investment automation technology. Earlier this year, Wealthfront was managing approximately $6.7 billion in client assets, compared to approximately $10 billlion in assets managed by Betterment (a platform with both a premium, human-advisor-focused offering and an institutional platform built specifically for existing human advisors). While Personal Capital lags in AUM at only $4.3 billion, it is most likely still leading Wealthfront and Betterment in revenue due to higher fees, and can boast a significantly higher average account size. In a league of its own, Vanguard's Personal Advisor Services has an astounding $51 billion in assets under management as of December 2016 (with recent reports suggesting this figure has grown to nearly $83 billion).

    Ben Brown is a Certified Financial PlannerTM professional and an IRS Enrolled Agent.  He is the founder of Entelechy, a fee-only financial planning and investment management firm based in Bethesda, MD, serving clients in the Washington, DC area and nationally.