Will computer algorithms replace human financial planners?
Friday, November 01, 2013 7:00 AM
In 2012, a young entrepreneur and former program manager for Microsoft Corp. talked about the mission of his startup company - an online investment advice and financial management company.
What Planners Say
Julie Fuller | CFP, CPA, Generations Wealth Management
I don’t think good financial advisers will be affected significantly by the online offerings, as financial planning is a process, and not an analysis at a point in time. We are there to partner with clients throughout their journey, as we all need encouragement to stay the course, as well as empathy to deal with unplanned life events. ... None of these soft skills can be entirely written into technical code or articulated in the short questionnaires offered by the websites.
Richard Rainforth | CLU, CHFP, LUTCF, Hansen & Rainforth Financial Group
I think transparency is a good thing. When I first started in 2000, those (fee) discussions weren’t happening because it just wasn’t out there.
The tone of the industry is toward more fee disclosure. Nearly every one of our investment statements lists the fees that are being deducted.
Lucus Scott | LUTCF, New York Life Insurance Co.
You can only tell so much from what your point total is on a risk questionnaire. Knowing the person, knowing that they want to buy a new house, or are planning to have a child, is important...Most people want to know that everything is working together towards their ultimate goal.
“We envision a world where old-school financial advisers are obsolete, except for the very wealthy. The convergence of technology, index funds and investment instruments are making this possible now. We want to empower the 99 percent, everyday investors with information they need to manage their own investments online,” Bo Lu, co-founder of FutureAdvisor, told InvestmentNews.
Lu and other tech entrepreneurs were onto the same basic idea, that computer algorithms could be used to manage investment funds for better returns and lower fees than the traditional methods offered by brokerages and financial planners.
It’s a big idea that has germinated into dozens of online investment company startups. Several of those have not only enlisted high-powered financial advisers to their teams; they also have attracted millions of dollars in venture capital to expand their distribution and capture market share.
Grant Easterbrook is an analyst with Corporate Insight, a New York City research firm that provides competitive intelligence and user experience information to the country’s leading financial companies. He tracks about 130 online financial services startups, including sites that offer algorithm-based investment advice using account aggregation. What that means is that investors can type all their investment accounts into a site and receive an evaluation of each fund and advice on how to manage the portfolio.
“We’re not totally sold on the idea that these will replace personal financial advisers,” Easterbrook said. “High-net-worth portfolios, multi-goal planning, trusts, etc. ... these are difficult to manage online.”
However, Easterbrook said the sites’ emphasis on fee transparency “probably will drive down the cost” of investment funds at a minimum.
Easterbrook’s newest report, released Tuesday, noted that “while many of these startups will inevitably fail, those that succeed could change the very nature of investing, particularly as Generations X and Y begin to accumulate wealth.”
The startups aim to serve the “mass affluent,” including young investors who do not yet have large portfolios, who gravitate to online services, and who may not be interested in spending time or energy to find and regularly meet with a personal adviser. Easterbrook said the bulk of managed assets currently are held by baby boomers. However, as that generation retires, the online advice sites may have a competitive advantage if they already have captured a marketshare of 20- and 30-somethings.
Another attraction for all generations of investors is the sites’ focus on exposing higher or hidden fees associated with some funds.
“It’s hard for the average investor to understand something like no-load funds, but they understand dollar signs,” Easterbrook said.
In fact, investors who already have a significant portfolio can use the sites to gain quick and easy analysis of their security holdings, he said, adding “that may start a lot of unpleasant conversations” with their planners.
Easterbrook said the startup investment advice companies he follows fall into two basic business models. Most offer algorithim-based analysis of portfolios, a dashboard to easily track all a user’s assets and the fees associated with those assets. A second group - sites such as Betterment and Wealthfront - will manage users’ portfolios online for very low percentage fees. He said his firm is a little more bullish on the first category.
Interestingly, the algorithim-based startups don’t seem to be much on the radar of Greater Des Moines financial planners, several of whom said they haven’t heard much concern, or even much conversation, among their peers about competition from computer-based investment advice.
“I really don’t see that it will be a huge impact.” said Lucus Scott, an agent and registered representative with New York Life Insurance Co. in West Des Moines, which sells life insurance, annuities, and investments. “It may be especially appealing to the younger generation that does everything online, so having something online sometimes they’re more comfortable with that,” he said. “But I think, no matter what the generation, there are some people who would like to do it on their own.” n
New Online Players
Dozens of startup online investment advice sites have gone live in the past couple of years. Here are five that have attracted venture capital, media attention and clients.
Live since January, the website tracks about $2 billion in assets and has around 10,000 users.
Capital: $15 million
Free services: Users take a quick online questionnaire that covers age and income, assets and savings rate, time to retirement, and desired income at retirement and enter their investments. Jemstep analyzes users’ portfolios and gives them advice, an action plan and online tools.
Fees: For continuous tracking and advice, customers’ first $25,000 investment is managed for free. Above that, sliding scale fees from $18 a month up to $79 a month for accounts of $600,000 or more.
Forbes compared it to Mint.com for the wealthy. TIme magazine declared it one of the 50 best websites in 2012. Founders include Bill Harris, former CEO of PayPal and Intuit.
Capital: $25 million in 2011
Free service: Rates your 401(k) fees by green (less than 1 percent), yellow (1 to 1.99 percent) or red (2 percent or higher).
Fees: Fund management fees start at 0.95 percent for the first $250,000 and go down for larger accounts.
SigFig began as Wikinvest, an investment tracking wiki, but switched its business model in 2012 to provide algorithm-based financial advice.
Capital: $15 million
Free services: View all your investment accounts in a single, secure dashboard, with regular analysis of the fees you are paying and the returns on your investment.
Fees: The company’s website says it doesn’t have to charge fees because it is paid commissions by brokerages or brokers for referring customers. It also uses a business-to-business-to-consumer model, in which it licenses its Web and mobile investment tools to publishers such as CNN, USA Today and Yahoo Finance in exchange for a revenue share.
Financial Guard expanded its business-to-business model of providing advice to employees on their 401(k) portfolios, to debut an online consumer investment site in September.
Capital: $5 million in private equity backing.
Free services: 30-day trial analysis of your portfolio that gives your funds a letter grade from A to F.
Fees: $15.95 a month, regardless of your portfolio size, to manage your portfolio.
Founded in 201 in Seattle by two Microsoft Corp. employees.
Capital: $5 million
Free services: Reviews your existing portfolio.
Fees: Nine dollars a month to manage a $50,000 portfolio; and $19 a month for portfolios larger than $50,000.