By Cyril Tuohy
“Roboadvisors” – perhaps you haven’t heard of them yet, but maybe you should.
The name alone conjures machines making decisions about your retirement account and allocating assets without investors having to engage in a face-to-face conversation. In many cases, that is exactly what they are, and they are cropping up around the country.
Companies like FutureAdvisor in San Francisco; Wealthfront in Palo Alto, Calif., and Betterment LLC in New York are catering to a new class of investors: those who are perfectly happy to let investment algorithms do the work.
Billed as “effortless automation,” Wealthfront, a Securities and Exchange Commission-registered investment advisor, supports individual taxable investment accounts, traditional, Roth and simplified employee pension individual retirement accounts (IRAs), 401(k) rollover accounts and 501(c) accounts for nonprofits.
Industry consultant and blogger Michael Kitces, in a blog post earlier this year, said 2014 is the year during which some roboadvisors will “pull ahead,” while others will turn into “cyborg” advisors blending the best of technology and human skills.
“While there's still little evidence to suggest that roboadvisors are drawing any volume of clients from human advisors, they are demonstrating how the core of constructing and implementing a passive, strategic portfolio can be commoditized for an extremely low cost,” Kitces writes.
Roboadvisors are way ahead of traditional advisors when it comes to cost. Wealthfront’s minimum account size runs as low as $5,000, and the first $10,000 in assets are managed for free, according to Wealthfront’s website.
Anything above $10,000 will cost investors 0.25 percent per year. The company has attracted software engineers from Silicon Valley giants to develop its algorithms.
Supporters of the roboadvisor movement say the companies fill a need, and address a segment of the market filled with pent-up demand.
Generation Y investors who are pressing into the professional ranks are comfortable using the Internet and the low fees appeal to their budgets. These young investors expect advisors to be available when they want, not at that advisors’ convenience.
Betterment is open from 9 a.m. to 8 p.m. weekdays, from 11 a.m. to 6 p.m. on Saturdays and even from 3 p.m. to 6 p.m. on Sundays.
Raef Lee, managing director and head of new services and strategic partnership with the SEI Advisor Network, told InsuranceNewsNet that roboadvisors offer more choices and can only help the advisory industry.
“I personally believe it’s good for the industry,” he said.
Roboadvisors, according to an SEI study, are “reinventing traditional service models and offerings,” and targeting a generation ignored by traditional advisors.
A roboadvisor called Motif Investing and another called Jemstep are “pure technology solutions” with no human advisors in the mix. Others, like Personal Capital and LearnVest, offer advisor services but only use the Internet to communicate with clients.
In nothing else, the upstarts are pressing industry giants like Vanguard Group and the online brokerage community like Schwab and E-Trade to take notice. Vanguard, for example, is testing a program that combines technology and human advisors.
Will roboadvisors flourish? There’ s not much room for more than two or three roboadvisors, according to Joshua Brown, a New York-based investment advisor for high-net-worth clients and retirement plans.
For the moment, the profit potential for roboadvisors is high – especially in a bull market – but “in the real world they are going to have to staff up substantially with human financial advisors and this costs a lot,” Brown writes. “Margins will be nowhere near projections.”
As investors accumulate wealth, investors leave for the bigger companies with face-to-face advice. The greater the wealth, the more complex the needs and that’s where the lawyers, specialized accountants and estate planners come in.
Kings, princes, warlords, emperors, despots, businessmen, entrepreneurs, inheritors, lottery winners, executives and other accumulators of wealth “will always seek out counsel, advice and assistance for the maintenance of their money and the continued assurance of their standard of living,” he writes, on a blog titled “The Reformed Broker.”
Nor are the roboadvisors really set up to provide insurance – sticking mainly with investment and brokerage services, tax-efficient investing, diversification, retirement accounts, and mutual funds and exchange-traded funds.
The real value of an advisor is to offer a holistic approach to investment and protection, taking into account investment wealth, insurance protection and more complex requirements around estate or intricate tax planning, for instance, Brown writes.
One more caveat about roboadvisors: Just wait until the next downturn.
When the Standard & Poor's 500 index jumps nearly 30 percent, as it did last year, even robots make money. The real question is how much protection the robots will be able to deliver in the face of an angry bear market.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
© Entire contents copyright 2014 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.