Discount brokerage firms revolutionized the financial world. Increasingly, discount advisory firms are poised to bring significant changes, as well.
In the past two years, a number of online financial platforms for investors have been launched. These sites offer computerized investment guidance aimed not only at the smallest customers, but also at those with upward of $250,000 in investable assets.
Should traditional planners see these companies, which some in the industry have derisively labeled robo-advisors, as potentially dangerous competitors? Or are these firms seeking out a wholly different market, a pool of investors with portfolios too modest to provoke much interest or to sustain the practice of a typical registered investment advisor?
ENTER SILICON VALLEY
The interest of Wall Street in the new firms was demonstrated in the past few years when Accel Partners and other investors infused $25 million of equity capital into LearnVest, a site that aims to serve as an electronic financial advisor for women. LearnVest's 28-year-old founder and CEO, Alexa von Tobel, notes that Facebook and Groupon are among the companies in which Accel Partners previously made early-stage investments, implying that LearnVest could become a powerful player in the corporate technology universe.
Already competing with LearnVest is Personal Capital, a firm led by an accomplished Internet executive, Bill Harris, former CEO of PayPal and Intuit. Among the startup's backers are a number of storied Silicon Valley figures, including Marc Andreessen, founder of Netscape.
Also gaining attention are sites like Betterment and Veritat Advisors. Others in the sector include eFinPlan and Silver Financial Planner.
One planner who thinks robo-advisors represent a fundamental threat to traditional RIAs is Alex Murguia, managing principal of McLean Asset Management in Northern Virginia and founder of inStream Wealth, a software platform for use by RIAs. "Disruptive technologies are something that you at first ignore, then you laugh at, next you fight and finally you lose to," Murguia says.
MODEST ASSET BASE
So far, most industry observers believe these discount advisors are small in terms of total assets under management. "When you look at how much has been spent setting up these online platforms, they're awfully small - at least, as of now," says Bill Winterberg, a technology consultant to financial advisors.
Veritat Advisors' president, Kent Smetters, who is also a full-time professor at the Wharton School of the University of Pennsylvania, would not divulge figures for his company's client roster or assets under management, saying the information was proprietary. A rival firm, Betterment, says it has about 20,000 customers and AUM of $60 million, growing at a rate of 20% per month.
These startups have adopted a number of different approaches and offer a varied range of products and services. Betterment, for example, has chosen to constitute itself as an RIA and broker-dealer. Even so, it does not permit its customers to buy individual stocks.
AUTOPILOT ENGAGED
Motivated by research showing that active investing and rapid stock trading are major causes of portfolio underperformance, it is set up so that middle-class investors can take out regular, automated allotments from their paychecks and buy Vanguard and BlackRock ETFs, or Treasury bills directly. Customer responses to an online survey are employed to determine appropriate model investment portfolios.
Veritat Advisors, by contrast, is an RIA, using Scottrade as its custodian. Smetters says that part of his inspiration for setting up his firm was a consciousness that many traditional advisors won't serve clients with less than $500,000 in assets.
"Our clients could have $50,000 - or less," he explains. "Ours is a mass-market play. It's a different addressable area, a complement to what traditional financial planners are doing. We're a solution for everyone else, not necessarily a form of competition. In fact, a number of financial planners have already recommended clients to us that were just too small for them to handle themselves."
In acknowledging that his company is focused principally on "low-hanging fruit," Smetters adds that Veritat is considering the idea of paying advisors for customer referrals. Currently, the company hires independent advisory representatives to work as independent contractors. Smetters says his company currently has fewer than 100 of these contractors.
For a onetime fee of $250 and an additional charge of $25 per month, Veritat customers get a dedicated advisor whom they may reach through a video call as many as six times a year. The company also arranges webinars for customers. Its online platform recommends investment allocation and provides customers with electronically generated quarterly reviews and then annual reviews on how their portfolios are doing and where they should be headed.
The more heavily funded LearnVest offers "unlimited email check-ins and a few phone check-ins each year" after a diagnostic call with one of its affiliated CFPs, von Tobel says. LearnVest's planning fees range from $229 to $349.
Perhaps more threatening to traditional independent investment advisors is Personal Capital. Also set up as an RIA, it charges no upfront fees, instead charging clients an annual fee of 1% of assets under management. In return, it offers a wide range of tax tips, easy-to-follow charts on the status of customers' investments and access to a designated personal financial advisor. Its main appeal may be the graphical ease and simplicity that its online organizer provides.
Harris says Personal Capital is the "culmination" of his vision - previously only partly realized, he says, at Intuit and PayPal - of creating a complete, secure investment mechanism for affluent American households.
Winterberg believes, however, that for now the appeal of these sites is "mostly for 20-somethings." He adds, "At this moment it's companies like Schwab and Fidelity that should be looking over their shoulders" because these sites supplant much of the role that these companies have carved out for themselves as the principal intermediaries for middle-income investors.
Betterment's CEO, Jon Stein, agrees, saying that his company "sees ING Direct as a role model. It's a great online savings account that can help you manage your money."
DOUBLE-EDGED SWORD
That these sites represent a double-edged sword for planners is indicated in their interest in hiring advisors, whether as employees or contractors, in many regions across the country.
LearnVest's site includes smiling photos of attractive young advisors, along with lively descriptions of their investing approaches and abbreviated bios listing their credentials. Von Tobel says the advisors' remuneration is not based on commissions but rather on their customer ratings as calculated from client surveys. The standards that the online firms use to select their advisors vary. Murguia emphasizes that the designated advisors assigned by these firms "are not necessarily CFPs."
Smetters says Veritat seeks investment advisors who have passed their Series 65 exams and have at least two years of experience - except in states where this is not required. In those locales, he says his company considers trust and estate lawyers, adding that it does criminal background checks, looks at educational background and conducts interviews.
It remains to be seen whether that's sufficient vetting to reassure investors who may have vague and undefined fears about the security of websites that aggregate their financial information and may also provide the means to get direct access to a client's money.
LIMITED SERVICE
The discount advisors are not yet providing many services that independent advisors can offer. LearnVest and Veritat, for instance, do not have the means to put their customers into insurance plans or to arrange for writing wills. They do, however, give advice on these and many other subjects. And offering these services may not be inconceivable in the future.
As Murguia notes, these sites already provide customers with a means to a clear, easily updated financial snapshot. Additionally, over time, their easy accessibility may drive even affluent customers to engage in conscious or unconscious comparison-shopping with respect to financial advice. In that case, well-heeled customers may come to think that planners who charge hundreds of dollars in hourly rates are pricey.
Such a trend could lead to "margin compression." This was the fate that befell the large brokerage houses when they were forced to compete with the discount brokers that have over time taken even many of their larger individual accounts away.
In the years to come, the lower-asset and younger customers discount advisors are hunting may prosper, in due course, to become the kinds of clients that planners now depend on. It is likely that providing competing online tools and information will soon be a necessity, Murguia says.
Jonathan Leaf is a New York writer who's contributed to The Weekly Standard and National Review. He has also done corporate writing and editing for Citibank, DLJdirect and Bear Stearns.
