Ai Financial Advice Pushes Further Into Consumer Finance

A 401(k) From a Robot? Digital Advice Pushes Further Into Consumer Finance

Robo advisers such as Wealthfront and Betterment are moving into ‘529’ plans and 401(k) accounts

By ARI I. WEINBERG Aug. 7, 2016 10:04 p.m. ET

A funny thing happened on the way to the robo-adviser revolution.

Robo advisers—automated investment services that assess risk tolerance and manage a portfolio of exchange-traded funds at a low cost—are running into the realities of the highly competitive wealth-management market, including thin profit margins.

So they are expanding in areas that didn’t used to be associated with robo advisers, including managing “529” college-savings plans, administering 401(k) retirement accounts and adding account features that involve partnerships or co-branding deals.

In effect, as traditional brokerage firms challenge the robos with their own lost-cost offerings, the robos are evolving.

For individual investors, this evolution is blurring the line between the robo advisers and the more traditional investment firms such as Vanguard Group, Charles Schwab Corp. and Fidelity Investments, which are quickly adding automated services.

“Over the past five years, there was tremendous enthusiasm from venture capitalists for funding startup financial-technology firms.…Now we’re seeing funding slow down,” says analyst Matthew Wong at CB Insights. “For consumers, it’s difficult to tell how much of the robo world is about branding and customer preference versus actual technological improvements,” he says.

College plan

Among the robo advisers moving into new markets is Wealthfront Inc. The Palo Alto, Calif.-based firm this spring began offering its automated Wealthfront 529 as an adviser-sold plan through Nevada. Wealthfront’s 529 features savings recommendations and rebalancing services at a cost of 0.43% to 0.46% of assets annually, including underlying fund expenses. That is higher than some 529 plans sold directly to consumers.

Seeking to become a more holistic financial-advice service, Wealthfront also announced “Wealthfront 3.0,” which allows customers to link and get advice on external bank and savings accounts, and eventually will allow them to integrate real-estate data and credit-card accounts, as well.

As of June 1, Wealthfront had 83,000 customers and managed $3.5 billion in assets, according to regulatory filings.

Acorns Grow of Irvine, Calif., is employing a strategy used by banks to help customers save money by “rounding up” purchases to whole dollars and depositing the excess into savings accounts. In May, Acorns launched its “Found Money” program in partnership with retailers, where money is deposited directly into the brokerage accounts of customers who jump on a coupon deal or make another qualifying purchase.

Acorns, which is backed by PayPal, among others, had 917,000 customers but only $197 million in assets under advisement through mid-July.

Betterment LLC, which has $5.1 billion in assets under management and 215,000 clients, entered the 401(k) market in March, offering a low-cost plan for small businesses and their employees. The New York-based firm also began offering its automated investment service as a platform for other financial advisers.

Business realities

Whether the robo firms’ burgeoning businesses remain independent or are bought by larger rivals depends on how much their financial backers are able to support product expansion in a highly competitive market.

“I’m not sure the venture capitalists ever really realized how tight the margins are in wealth management. There’s the cost of trading, the people and the disclosure,” says Phil Blancato, chief executive of Ladenburg Thalmann Asset Management in New York, which offers a “robo” solution to the 4,000 independent advisers on its platform. “Automation is a good idea, but it really takes significant assets to get to the lowest cost.”

Still, as the Labor Department monitors fiduciary advice on retirement accounts, Mr. Blancato sees a further move toward automated advice to reduce risk exposure for financial advisers, who will be challenged to show how their personal touch and execution adds value relative to more automation.

Wells Fargo & Co., J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. have all said they plan to offer low-cost, automated investment services either on their own or by joining with a private-label robo adviser. And BlackRock Inc. a year ago bought FutureAdvisor, a San Francisco-based firm that has developed a tool that is similar to products offered by Wealthfront and Betterment.

Demitry Estrin, a managing director of research firm MARU/VCR&C in New York, expects customers in the future will want a brokerage firm or adviser that offers any combination of three services levels—self-directed, automated advice and professional input—as well as some amount of financial planning and even insurance offerings.

How these companies pull it off and what they charge “will determine whether they keep the customer,” he says.

Mr. Weinberg is a writer in Connecticut. He can be reached at reports@wsj.com.


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