Please dont call them robo-advisers. Thats obviously a derogatory term, says Adam Nash, president of Wealthfront. He prefers the term automated investment services. So does Betterment and SigFig, two other leading wealth management firms that use algorithms instead of humans to manage billions of dollars in individual portfolios. With software running the show, the tech startups cancharge clients drastically lower fees.
Please dont call them robo-advisers.
Thats obviously a derogatory term, says Adam Nash, president of Wealthfront.
He prefers the term automated investment services. So does Betterment and SigFig, two other leading wealth management firms that use algorithms instead of humans to manage billions of dollars in individual portfolios. With software running the show, the tech startups cancharge clients drastically lower fees.
This sounds like a mortal threat to the nations 300,000 human financial advisers, an occupation that ranks high on best jobs lists for its good pay and work-life balance. And many analysts agreethe sector is ripe for disruption, the same kind now shaking up the nations taxi fleets.
Theres an opportunity to do an Uber of another industry, says Uday Singh, partner at management consulting firm A.T. Kearney.
The tension of robot vs. humans is expected to play out in an increasing number of jobs in the coming years as computers get faster, the algorithms smarter. For financial advisers, the battle is already underway just as waves of baby boomers are hitting retirement and members of the even larger millennial generation reachthe point in their careers when they are thinking about settingaside funds.
Billions of dollars in feesare upfor grabs. The robo hype might be real. Or maybe advice dispensed by humans will triumph. But neither side is waiting around to see how it shakes out, illustrating how the future of many industries will feature a continuing evolution, with each side trying to maximize its particular advantage.
Singh believes algorithm-driven investments will be mainstream in just a few years. He co-authored a 2015 study that found consumers have rapidly turned to robo-advisers after just a couple years on the scene, with these companies projected to be managing nearly 6 percent of all U.S. investments, about $2 trillion worth, by 2020.
There is every reason to believe that adoption will be exponential, Singh says.
But mention Singhs study to someone like Frank Moore, chief investment officer at Vintage Financial Services in Ann Arbor, Mich., and he chuckles dismissively.
There is so much you cant do through a computer screen, Moore says, pointing to the counseling he did of clients during the stock markets dark days in 2008 and 2009. Thats not something you can program into an algorithm.
Geoffrey Brown, head of the National Association of Personal Financial Advisers, agrees.
Theres no way the robo-adviser product platform is going to take away the human interaction that comes with working with a financial adviser, Brown says.
Some dismiss robo-advisers as just target-date funds with slicker marketing -- meaning that firms such as Vanguard, which offers similar services, would have the most to lose.But that hasnt limited theimpact of robo-advisers.
They are revolutionizing everything, says Randy Kurtz, president of financial advisory firm BetaFrontier in Chicago.
Kurtz said the days of advisers just picking investments and mailing quarterly statements is over. Now, advisers need to spend time with clients, discussing goals and craftingstrategies to different needs.
The human adviser needs to be even more human.
The people who will survive will be more holistic, Kurtz says.
The rise of these automated services already has driven smaller portfolio-managementfirms to merge with firms that offera wider range of wealth management services, says Louis Diamond, vice president at Diamond Consultants in Morristown, N.J., a search and consulting firm for financial advisers.
They are seeking out access to tailored, white-glove services, Diamond says.
Those skills are beyond computers, for now. Thats why Alex Benke, director of advice products at Betterment, thinks financial advisers will continue to have jobs.But those jobs arechanging.
I think what is being disrupted is the selling of a portfolio and not doing anything else, Benke said. Weve commodified the portfolio piece.
Betterment, based in New York City, manages $3 billion for 118,000 customers. Theres no minimum balance -- another development that has spread to traditionalfinancial advisers who are hoping to capture investors earlier. At Betterment, fees range from 0.15 percent to 0.35 percent of assets. Thats significantly less than thetypical adviser fee, which hovers around 1 percent.
Betterment plans to start offering 401(k) services to companies in 2016. Earlier this year it launched a service for advisers that allows them to provide robo-services to their own clients.
Wealthfront, based in Palo Alto, Calif., charges a 0.25 percent management fee on accounts above $10,000 and no fee below that, with a $500 minimum.
Robo-advisers ask customers their age, income and questions gauging risk tolerance before selecting a series of exchange-traded funds. Many of the companies also offer tax-loss harvesting and automatic re-balancing. All decisions are made by algorithms.
Its the continuation of a long-running trend toward technological innovation and lower fees in financial services, says Nash, Wealthfront president. In 1975, Charles Schwab opened its doors as the nations first discount brokerage. Then Vanguard introduced index funds. More recently, exchange-traded funds became popular.
Now, its algorithm-driven investments.
Some of the larger firms have decided to imitate the newcomers. Both Schwab and Vanguard launched robo-adviser services earlier this year. And smaller advisers talk about the potential for continued downward pressure on their own fees from these new low-cost rivals.
Thats not the only problem facing the industry.The profession is graying the average adviser is 51, with fewer than 5 percent younger than30, according to Cerulli Associates. At many industry conferences, theres at least one session on planning for the death of a lead financial adviser.
Its concerning, said Brown, head of the personal financial advisers association.
But with a third of advisers heading to retirement in the next decade, theres a huge opportunity -- for someone, whether it's humans or computers.
Nash says Wealthfront is optimized for millennials. Thats the target market. Sixty percent of its clients are under 35 years old.
Betterment noted that while millennials make up the bulk of its customers, 30 percent of its business comes from clients older than 50.
The question is who will capture the next wave of investors -- someone like Yazmin Chavira, whose views oninvesting show howmessy and contested the future of financial advising will likely be.
Chavira, 31, is a math teacher living in Long Island City, N.Y. She got interested in investing a couple years ago. The negligible interest rate on her bank account was not cutting it. At first, she considered opening a self-directed account to buy index funds. But she kept looking.
A financial adviser would be too expensive, Chavira thought. And her situation was not complicated. She knew her parents preferred sitting down with someone to discuss finances. But she already entrusted so much of her life to computers banking, health insurance, travel booking and shopping. She started reading about robo-advisers. She was intrigued.
Humans can make mistakes, Chavira says. Computers do only what we ask them to do.
She opted to open an account with Betterment.
But, Chavira says, if one day she felt the need, she wouldnt rule out visiting ahuman for financial advice.