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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