Tag Archives: Betterment

FPPad Bits and Bytes for April 1, 2016

Posted on April 1, 2016 by in Bits & Bytes

On today’s broadcast, Betterment raises $100 million in fresh capital, Fidelity tests FidelityGo, Schwab pulls the plug on OpenView Integrated Office, and more.

So get ready, FPPad Bits and Bytes begins now!

(Watch FPPad Bits and Bytes on YouTube)

First, a heads up, Steve and I will be on the road later this month covering the massive NAB 2016 event, scouring the exhibit halls for technology you can use to make great videos and podcasts, followed by the 2016 Shareholders Service Group conference in San Diego. Visit fppad.com/subscribe and sign up today so you don’t miss any of our coverage from the events.

Betterment Raises $100 Million from Betterment.com

[Now on to this week’s top story which comes from Betterment, as the automated investment service raised another $100 million dollars in venture capital, bringing the total amount they’ve raised to $205 million. Betterment is pulling away from a crowded field of robo competitors, now servicing over 150,000 customers, managing $3.9 billion in assets, and valued at a reported $700 million.

Betterment says they will use the funding to grow the Betterment for Business 401(k) platform and the Betterment Institutional offering for you, the financial advisor.

But despite all the money raised and what they say about being their customer’s central financial relationship, Betterment’s questionnaire still doesn’t tell customers that they should pay off high interest credit card debt or build up an emergency fund first before investing. Oh, that’s right, customers can find that advice somewhere on the blog.

So I’ll reiterate what I posted on Twitter this week: Betterment, I hope you use the money to make unbiased fiduciary advice accessible & affordable to everyone.

If you want to read more about the latest round of Betterment’s funding, head over to fppad.com/183 for the links to this week’s top stories.] Today marks an important milestone for Betterment and our more than 150,000 customers who have invested over $3.9 billion with us. We’re excited to announce that Betterment has closed a $100 million investment, led by a new partner, Kinnevik.

Fidelity Starts Testing Robo-Adviser Service on Existing Clients from Bloomberg.com

[Next up is news from Fidelity, as the company announced plans to begin testing Fidelity Go, its own automated investing service for retail investors, with roughly 500 customers this week, with an official rollout sometime in the second half of this year.

If you remember back to November of 2015, Fidelity broke off its relationship to promote Betterment Institutional to advisors, and then coincidentally announced the Fidelity Go retail product that competes more or less with Betterment. Fidelity Go will feature investment portfolios managed by Geode Capital Management, all in fees at 39 basis points or lower, automatic rebalancing, but no tax loss harvesting.

With Fidelity Go as a retail offering, you should know that Fidelity told me that a B2B version is under development, and while they couldn’t give me a solid release date, they did say the offering will be customized to your needs as an advisor.

Nevertheless, Fidelity joins Charles Schwab as an institutional custodian with an automated investment solution in the retail space, but at no platform fee in exchange for a little extra cash allocation, Schwab Intelligent Portfolios, in my opinion, is going to be tough to beat.] Fidelity Investments, the second-largest U.S. mutual fund company, will test an automated-investment service starting Wednesday on a small group of existing customers. Fidelity plans to offer the service to the public in the second half of this year.

Schwab Unplugs Its Customized Version of Salesforce from WealthManagement.com

[And speaking of Schwab, this week’s final story is news that Schwab Advisor Services is discontinuing the Schwab OpenView Integrated Office solution effective July 31. Roughly 150 firms are using the solution, so they’re going to have to find some other technology to replace Integrated Office, specifically the custom version of Salesforce that came with it.

The link to the story at fppad.com/183 has the details on options for affected advisors, including using Salesforce with Schwab OpenView Gateway or migrating to a completely new CRM, but here’s the angle I want to focus address.

This is absolutely an example of what can happen when you choose a custodian’s proprietary solution for a part of your technology. How committed is that custodian going to be to offer that technology over the lung run? In this case, Schwab, for whatever reason, is shutting down Integrated Office, leaving 150 advisors with just three months to figure out what to do.

So I don’t blame you one bit for getting a little uneasy when custodians offer proprietary technology solutions to you that they own and control. But with more custodian acquisitions of technology on the horizon, I’m afraid this is a risk you’re going to have to assume more frequently as time moves on.

One more thing: if you want a firm with Salesforce experience in financial services, get your pencils out, because you should consider contacting LiquidHub, Concenter Services, Navatar, Salentica, or AppCrown.] One hundred fifty Charles Schwab advisors must find a new client relationship manager (CRM) by July 31.

Here are stories that didn’t make this week’s broadcast:

Envestnet | Tamarac Rolls Out New Household Structure and Service Team Functionality in Advisor View™ Client Portal from PRNewswire.com

Envestnet | Tamarac has launched four major software updates designed to strengthen RIAs’ online engagement with clients. The roll-out is part of the firm’s March 2016 technology release.

Advyzon Integrates Laser App Software to Enhance Client Advisor Relationship from LaserApp.com

Laser App Software, the premier provider of forms automation and management software for the securities and insurance industries, has announced that Advyzon, an all in one cloud-based platform combining portfolio management, performance reporting, CRM, client portal and planning, integrated with Laser App Software to enhance its client dashboard.

Marketware International is pleased to announce that it has become a new member of the IBM Watson Ecosystem Partner Program.

Our team has been hard at work creating the AdvisorQA mobile product experience for Financial Services. It provides a new mobile Content Management and Social Collaboration tool that utilizes the cognitive computing and research capabilities of IBM Watson.

 

Watch FPPad Bits and Bytes for April 1, 2016

Watch FPPad Bits and Bytes for April 1, 2016

FPPad Bits and Bytes for January 29

Posted on January 29, 2016 by in Bits & Bytes

On today’s broadcast, Betterment launches 401k plans for business, Morningstar updates its iPad app for advisors, Vestorly raises a new venture capital, and more.

So get ready, FPPad Bits and Bytes begins now!

(Watch FPPad Bits and Bytes on YouTube)

Betterment for Business Officially Launches and Announces Advisory Board from PRNewswire.com

[This week’s top story features Betterment, as the automated investment service announced the official launch of Betterment for Business, the company’s 401(k) plan for employers.

Earlier this month, Betterment for Business received a very strong endorsement from the founder of a start-up called Estimize, saying the plan was so easy to set up that it could potentially crush the 401(k) industry.

With plan fees ranging from 60 basis points all the way down to 10 basis points for billion-dollar plans, and an interface built for ease of use, Betterment’s offering might actually be one that you recommend to your small business-owner clients, and you might even consider it for your own company’s 401(k) needs.

Among large 401(k) plans, established providers like Vanguard, Fidelity, and Financial Engines have a sizable advantage, but underserved companies establishing their first 401(k) plan should see Betterment as a very attractive solution.

This reminds me of how Betterment targeted young underserved investors back in 2010… huh.] Betterment, the largest automated investing service, today announced the official launch of Betterment for Business. The new 401(k) platform, which uses smarter technology and includes personalized investment advice for all plan participants, is now live for a charter group of plan sponsors and participants.


Preview Morningstar’s new iPad app dashboard for advisors from Morningstar

Sigma Prime leads Series A round for Vestorly from PEHub.com

Vestorly, Inc. the leading content marketing platform in financial services headquartered in New York City, today announced a Series A round of funding of $4.1 million.

New cloud storage options for Office mobile and Office Online from Office.com

Today, we’re making Office even easier for customers to use with cloud storage providers by adding real-time co-authoring with Office Online for documents stored in partner cloud services, extending our Office for iOS integration to all partners in the CSPP, and enabling integration between Outlook.com and cloud storage providers Dropbox and Box.

Watch FPPad Bits and Bytes for January 29, 2016

Watch FPPad Bits and Bytes for January 29, 2016

Will 2016 bring a “run on the robos?”

Posted on January 6, 2016 by in General

How well are the online investment services prepared for a run on the bank type scenario?

How well are the online investment services prepared for a run on the bank type scenario?

Edit January 6, 2016: Added details that Personal Capital Advisors uses the custody services of Pershing Advisor Solutions LLC. Removed this tweet from a user of Personal Capital’s free dashboard, replaced with the Wealthfront tweet seen below.

I’m posting this today, as I’m genuinely concerned about what will happen when online investment services get flooded with redemption/account close requests.

“You STINK”

For example, take this tweet (note to readers in the future: if the embedded tweets below get deleted, I captured screenshots that I can post for posterity):

I stumbled across this tweet, as this person is upset about their portfolio performance.

So this got me thinking:

What happens when online investment services get flooded with redemption requests and account closures?

Run on the Robos

If an online investment service isn’t responsive to requests and complaints in a public forum (Twitter), how well will they respond once they are deluged with irate customers who are fed up and want out quickly?

“Sorry, we have a big backlog right now, but no worries, your money is still safe?”

¯_(ツ)_/¯

I don’t ever want to see businesses fail. I don’t ever want to see investors get into difficult situations regarding their investments.

But I fear that if a trickle of dissatisfaction with online investment services quickly becomes a flood, online services will get crushed.

Not picking on Personal Capital

Before you go, don’t assume that I’m picking on Personal Capital.

Yes, tweets above that are related to their company trigged my question of what happens when account closure rates skyrocket, but Personal Capital uses the custody services of Pershing Advisor Solutions LLC (it’s on page 5 of their Form ADV Part 2A Appendix 1).

Look, Pershing is a very large financial institution with nearly $1.5 trillion in global assets under administration and 75 years of experience.

200 account closures a day probably doesn’t make them sweat. 1,000 a week? That might be an average week. ACH, DTC, ACAT, they don’t bat an eye.

But for the startups that manage their own proprietary systems on top of Apex Clearing? Have they been tested?

I suppose I can contact them and ask, but what answer do you think I’m going to receive?

“Oh, Bill, thank you for bringing this to our attention, and as a result we found bottlenecks in our processes and have improved our ability to efficiently and accurately process account redemptions and closures.”

I don’t think so.

I’ve heard this before: “Once you go robo, you don’t go back.”

That, and I wanted the first Internet timestamp for “run on the robos.”

BlackRock to acquire FutureAdvisor

Posted on August 26, 2015 by in Technology

BlackRock to acquire FutureAdvisor

BlackRock to acquire FutureAdvisor

In a press release this morning, BlackRock, Inc., the world’s largest asset management firm by AUM (source: relbanks.com) announced it has entered into a definitive agreement to acquire FutureAdvisor. Terms of the acquisition were not disclosed.

Let’s hit some fast facts again, shall we:

  • FutureAdvisor was founded in 2010 and had raised $21.5 million in four rounds (source)
  • FutureAdvisor had a reported AUM of $600 million in June 2015 (source), though their most recent SEC Form ADV from September 2014 reflected $232 million. This lagged online automated investment leaders Wealthfront and Betterment by approximately $2 billion as of August 2015
  • FutureAdvisor charged a Subscription Fee for the Premium Service of 50 basis points, making it more expensive than competitors Wealthfront and Betterment
  • Assuming a 50 bps fee on all $600 million results in gross revenue run rate, at best, of $3 million (remember AUM of $232 benchmarked in September 2014)

What does this mean for advisers?

Not much. Really. Return to your business.

But here’s the thing. BlackRock is an asset manager. BlackRock does well when its asset base grows. How can the company continue to grow its assets?

One way is to offer a new, simple, and attractive way for investors to automatically add their assets to low-cost, broadly diversified portfolios of funds and ETFs.

Enter FutureAdvisor.

A bonus for BlackRock is if the company can find a way to invest those assets into BlackRock-managed products.

Say, iShares ETFs.

What to do now

You come to FPPad for ideas on what to do with the technology in your business. So here’s what I think you should do.

Number one: Offer your own online, user-friendly interface

If the world’s largest asset manager sees the need to add a low-cost user-friendly online asset allocation tool to its arsenal, isn’t it time you have one for your business?

Prospects are comparing your capabilities to the services they see from Wealthfront, Betterment, FutureAdvisor, et. al., and if you come up short and don’t have an answer to their slick platforms, you’re probably viewed as a laggard.

Number two: Tell clients what you really do

Automated investment management is a commodity.

Anyone can get it from Schwab, Wealthfront, Betterment, FutureAdvisor. You could argue that the first mutual funds were the earliest automated investment management solution!

Sure, tax loss harvesting, daily rebalancing, and instant deposits are bells and whistles for automated investment solutions, and the results of whether or not those features actually result in any additional money in customers’ pockets is highly dependent on each customers’ personal situation.

But for you, as an advisor, investment management is just ONE of the things you do. It’s not the ONLY thing you do.

You do SO MUCH MORE.

So let clients know.

Even better, let your prospects know how much more you do.

You’re not justifying the fees you charge, you are reinforcing the value you provide by giving clients the service they need in ALL areas of their financial life.

You go WAY BEYOND investment management.

So do that. Tell clients what you really do, and why what you do goes way beyond automated investment management.

Betterment is poised to overtake Wealthfront in AUM

Posted on August 16, 2015 by in General

AUM 600In the race for robo adviser supremacy, neither Wealthfront nor Betterment wants to be runner-up.

Love it or hate it, AUM, or assets under management, is the default metric by which investment management businesses are benchmarked.

Robo-Advisor AUM

Certainly, many automated investment services (or rather, robo-advisors) have been flaunting their AUM figures in recent years, to, well, I don’t know why, exactly, other than to beat their chest on how good they are at gathering assets.

The most vocal automated investment service for publishing AUM figures is Wealthfront, with periodic blog posts issued when the company passed the round numbers of $500 million, $1 billion, and $2 billion in AUM.

Taking the more subtle approach to AUM milestones is Betterment, long viewed as the runner-up to Wealthfront in the AUM-gathering contest since 2013.

Instead, Betterment mentions the number of customers it serves first (in part because they have more than Wealthfront, so they can be number one in that comparison), followed by the level of AUM represented by their customers.

Still, there are a few posts from Betterment that place dates on when the company crossed $1 billion (with 50,000 customers) and $2.5 billion (with 100,000 customers). One has to dig through trade publications like TechCrunch and Forbes to put a date on earlier AUM figures like the company’s first $100 million and $500 million, respectively.

Ok, fine. So how is that asset gathering coming along today?

Graph of Wealthfront vs. Betterment AUM Growth

This morning I wanted to take a quick look at the AUM growth of the two leading automated investment services, Wealthfront and Betterment. But after 10 minutes of Googling, I had no charts or graphs of how each company is growing their AUM.

So I built a quick Google Sheet using the dates and AUM figures from most of the blog posts and articles cited above. Here it is!

Wealthfront vs. Betterment AUM Growth

Wealthfront vs. Betterment AUM Growth

 

So what is my biggest takeaway from this chart?

Betterment poised to overtake Wealthfront in AUM

Betterment has consistently lagged Wealthfront’s AUM since 2013, and Wealthfront’s growth rate was higher than that of Betterment, but then something changed around December 2014.

The rate of Betterment’s AUM increase accelerated, while Wealthfront’s growth rate generally remained the same from January 2014.

And the most recent figures for August 2015 show that Betterment has significantly closed the AUM gap with Wealthfront.

This being mid-August, and assuming Betterment’s faster growth rate continues as it has since the beginning of 2015: Betterment is poised to overtake Wealthfront in AUM.

What Happened to Betterment’s AUM Growth?

What happened to boost Betterment’s AUM growth starting around December 2014. I suspect the cause is:

Betterment Institutional

So not only does Betterment have its own client acquisition strategies (web banner ads, TV commercials, ads on taxis and phone booths in NYC…), now the company has a new salesforce, if you will, of investment advisers who are using the Betterment Institutional service for their emerging clients.

This new cadre of advisers likely stands at a hundred or so today, but as the popularity and appeal of automated investment services expands, potentially thousands of financial advisers may be directing their emerging clients to use the low-cost service.

This is a totally new salesforce and asset gathering funnel that Wealthfront lacks today.

So in the race to be the dominant VC-backed automated investment service measured by AUM, the guard is about to change.

And nobody wants to be number two.

FPPad Bits and Bytes for August 14

Posted on August 14, 2015 by in Bits & Bytes

On today’s broadcast, Envestnet acquires account aggregation provider Yodlee, Advizr makes two announcements to close the gap among financial planning software, and find out why automated investing services might be losing their competitive advantage.

So get ready, FPPad Bits and Bytes begins now.

(WatchFPPad Bits and Bytes on YouTube)

Today’s episode is brought to you by eMoney Advisor, host of the eMoney Advisor Summit coming October 19th through 21st in Orlando.

emoney summit

Take a deep dive into the emX strategies that help you Connect, Engage and Win with your clients. Plus, everyone watching this show can take advantage of a one hundred dollar discount off your registration, so visit fppad.com/emoneysummit15 today and use promo code FPPAD100. That’s FPPAD100.

Here are the links to this week’s top stories:

Envestnet to Acquire Yodlee from Envestnet

[This week’s top story comes from Envestnet, as the wealth management technology and service provider announced it is acquiring Yodlee in a deal valued somewhere around $660 million. Now most of you know Yodlee for account aggregation, but Yodlee really doesn’t sell services directly to advisors.

Instead, some advisors benefit from Yodlee aggregation through third-party integrations, with MoneyGuidePro being the most well know,after announcing a Yodlee integration to much fanfare last year, priced at a dollar per day. You can get more details on that in episode 120 that I linked over here.

So let’s cut to the chase: is this good or bad? If you’re an Envestnet technology user, this is really good. Aggregating clients’ held away accounts gives you better visibility on what clients actually own, how they’re allocated, and in some cases, how they manage their cash flow. This information can only make the advice you give better, and that’s a fantastic thing for everyone!

BUT, if you compete with Envestnet and/or take advantage of Yodlee aggregation today, the future isn’t so clear. It’s way too early to speculate what’s going to happen to Yodlee’s pricing and availability, but if efficient account aggregation is a cornerstone of your business, it might be time to keep alternatives like Aqumulate, ByAllAccounts, or Quovo in mind.] Envestnet, Inc. (NYSE:ENV), a leading provider of unified wealth management technology and services to financial advisors, and Yodlee, Inc. (Nasdaq: YDLE), the leading cloud-based platform driving digital financial innovation, today announced that the Boards of Directors of both companies have unanimously approved a definitive agreement under which Envestnet will acquire all of the shares of Yodlee in a cash and stock transaction valued at $18.88 per share, or approximately $660 million on a fully-diluted equity value basis.

 

Introducing: Advizr Express from Advizr

[Next up is news from Advizr, an up-and-coming financial planning software provider, who this week made two announcements. First is the introduction of a prospecting tool called Advizr Express, allowing you to attract prospects by offering a super-simple retirement readiness illustration either on your website or for use with prospects during an initial meeting. Advizr Express is in beta testing today with an official release anticipated later this month.

Advizr’s second announcement is a new integration with Orion Advisor Services to import client portfolio holdings to avoid manually entering that information by hand. This adds to an existing integration with Blueleaf, and should be a preview of what to come with connections with many of the leading custodians. Wink wink.

So while Advizr is still a ways away from offering the number of integrations found in category leaders like Advicent, eMoney, and MoneyGuidePro, updates like these should help Advizr close the gap and offer you more choice in the tools you use to deliver financial planning.]

Automation Won’t Replace People as Your Competitive Advantage from Harvard Business Review

[And finally, I want to wrap up this week’s broadcast with an article from Harvard Business Review titled Automation Won’t Replace People as Your Competitive Advantage. For two years and seventy episodes of Bits and Bytes, the chatter about automated investment services and algorithmic rebalancing has reached a fever pitch, but scroll down to the end of that article and you’ll read a striking statement:

“Once smart machines are built to solve problems in asset efficiency (or indeed any area of operations) they very rapidly spread and become pervasive across an industry. Therefore, they cease to provide a competitive advantage.”

I think this perfectly describes what’s happening today in automated investing. Sure, six years ago, Wealthfront and Betterment attracted attention because there was nothing out there like their automated services. Their exclusivity was their competitive advantage.
But fast forward to today where automated services are available from Schwab, Vanguard, Future Advisor, Blooom, and even LPL Financial having announced their own plans for an automated service. Automated investing is becoming pervasive.

But what that also says to me is that if you don’t have some kind of low-cost automated service to offer, it may actually be viewed as a disadvantage because they’re so common in the industry. It’s like telling clients you won’t communicate with them via email. It’s so pervasive, who DOESN’T use email?] Geoff Colvin’s primary argument is that there are some unique human capabilities, like empathy and storytelling, that will keep people employable even as automation chips away at the content of most jobs.

 

Watch FPPad Bits and Bytes for August 14, 2015

Watch FPPad Bits and Bytes for August 14, 2015

FPPad Bits and Bytes for June 12

Posted on June 12, 2015 by in Bits & Bytes

On today’s broadcast, Pershing partners with a new company for your digital advice delivery needs, Wealth Access continues its growth in the PFM space, and find out how open source code called Wealthbot could pose a serious challenge to automated investment services.

So get ready, FPPad Bits and Bytes begins now.

(WatchFPPad Bits and Bytes on YouTube)

Here are the links to this week’s top stories:

Pershing Implements Multi-faceted Digital Enablement Strategy to Help Advisors Embrace the Digital Revolution from Pershing, and

Pershing Introduces Managed360™ to Help Advisors Efficiently Grow Their Managed Accounts Business from Pershing

Marstone Digital Wealth on the web

[Let’s jump right in to this week’s top story with a recap of the Pershing INSITE conference held in Orlando last week, as one of the top institutional custodians for advisors made several technology-related announcements. First up is news of a partnership to allow advisors to offer their own white-labeled online investment service which will be powered by a company called Marstone.

Now if the name Marstone doesn’t ring a bell, don’t worry, because it’s only the second time I’ve even heard of them after a chance encounter I had with company executives at the IBM World of Watson event last month. In fact, the company is so new that their latest Form ADV disclosure shows assets of just $15,500 held in two clients accounts. That’s right, two accounts.

Now the few screenshots available from the Marstone website show a reasonably attractive interface, but with a retail investor offering that’s still in beta and an advisor solution that has yet to roll out, it’s just too early for me to say whether or not Marstone is going to gain wide adoption among advisors, especially when there are more seasoned competitors out there like Jemstep, Betterment Institutional, Oranj and more.

But, Marstone will be the first of several anticipated solutions that will integrate with Pershing’s NetX360 platform for advisors as well as the NetXInvestor solution for end clients.

Pershing also announced a new managed account solution called Managed360 that will leverage investment strategies and managed portfolio offerings from Lockwood Advisors, which also happens to be an affiliate of Pershing. Also coming in the future is a Pershing API store which is a catalog of APIs along the lines of the TD Ameritrade Institutional Veo Open Access platform, allowing third-party providers to more easily integrate with the Pershing ecosystem.] At its INSITE™ 2015 conference, Pershing LLC, a BNY Mellon company, today announced a multi-faceted digital enablement strategy designed to revolutionize how advisors and investors work together in 2015 and beyond.

Wealth Access Hires 7 Veterans to Continue Growth from PRWeb

[Next up is news from Wealth Access, the Nashville-based provider of a personal financial dashboard for high net worth clients, as this week the company announced the growth of its business with seven new hires in the last few months, as well as a 350% year-over-year increase in total assets aggregated in the platform, a figure that now exceeds $20 billion.

You know that merger and acquisition activity in the personal financial management space this year has been on a tear, with Fidelity acquiring eMoney, Northwestern Mutual scooping up LearnVest, and John Hancock picking up Guide Financial, so Wealth Access is pretty much one of the last independent PFM platforms out there serving advisors that has no direct custodial or insurance company connection.
So like I’ve said in previous broadcasts, you would be wise to keep an eye on this company.] Wealth Access, an innovative high net worth personal financial management platform for advisors, announced growing momentum in the adoption of the Wealth Access technology solution by advisors, with record year over year growth and the hiring of seven senior technology and financial services veterans.

Wealthbot.io from GitHub

[And finally, wrapping up the week is an interesting discovery I made on the Internet called Wealthbot. Now stick with me on this one. Wealthbot is open source code published on the GitHub repository that can be used to create your own wealth management platform.

Not satisfied with the commercial wealth management solutions available today? That’s right, you can now build your own robo advisor, I mean, automated investment service. Now developers should get excited about the possibilities here, but advisors using Wealthbot directly? Well, that’s probably not going to happen without significant help from programmers.

But here’s the thing: online services like Wealthfront, Betterment, Future Advisor, even Schwab Intelligent Portfolios have attracted huge amounts of attention and venture capital for their software-based investment algorithms. So what happens to the value of those companies when code that mirrors their functionality is published on the Internet, for free?

Could Wealthbot be the next WordPress, OpenOffice, or Firefox of robo advisors? That, ladies and gentlemen, is why you’re watching FPPad Bits and Bytes.] Wealthbot.io makes it easy to launch a Wealth Management Platform. Build and customize your very own version of a robo-advisor.

 

Watch FPPad Bits and Bytes for June 12, 2015

Watch FPPad Bits and Bytes for June 12, 2015

Robo advisor is a perfect moniker and here’s why

Posted on June 9, 2015 by in General

tl;dr: Algorithms are incapable of giving financial advice, so the oxymoron “robo advisor” is a perfect moniker. Know what you’re getting (and not getting) from automated investment services.

“I am tired of the whole robo thing,” says Motif Investing CEO Hardeep Walia.

Personal Capital CEO Bill Harris bemoans, “We are not a robo advisor.”

Wealthfront CEO Adam Nash retorts, “New tech doesn’t always fit neatly into a bucket.”

Cry Me a Robo River

To the automated investment services, I say,

“Boo hoo.”

NOW these services are beginning to experience how it feels when others, right or wrong, control the conversation about their business.

Most journalists, reporters, TV anchors, correspondents, bloggers and more don’t really know what makes any of the automated investment services different from one another, so most simply package them up into one catch-all term “robo advisor.”

Let’s face it: “robo-advisor” makes for great click bait. If it didn’t work (and generate clicks and eyeballs), editors and producers would stop using it. (You clicked to land here, didn’t you?)

But please, asking everyone to stop using “robo advisor” because it misrepresents what you do or somehow marginalizes your service in some way?

I submit to you Exhibits A and B.

“You don’t need that guy,” gloats Wealthfront’s ad.

Sure, because most financial professionals out there are just glorified psychics, spiritualists, or stock market prognosticators whose only tool for financial advice is a crystal ball!

Please.

The financial services industry has seen this marginalization long before automated investment services arrived.

Living In Glass Houses

The fiduciary financial professionals should be just as upset about this gross characterization of fortune tellers as the automated investment service providers are about the term “robo advisor.” (people who live in glass houses…)

“Stop comparing us to fortune tellers!”

“We are not personal psychic advisors!”

Perhaps Wealthfront paints with too broad a brush. Ok, so here’s Exhibit C:

Wealthfront: Don't Pay For Expensive Financial Advisors

Wealthfront: Don’t Pay For Expensive Financial Advisors

See? “Don’t pay for expensive financial advisors.”

Why not?

Because Wealthfront is the end-all-be-all service that investors need? Because Wealthfront does the exact same thing all fiduciary financial advisors do? Because all your financial needs are met by Wealthfront’s software?

Ask a Question 100 Times…

Go ahead, go to any automated investment service website right now. Wealthfront. Betterment. Future Advisor. Even the anti-“robo-advisor” Personal Capital. (*read my note below)

Fill out their questionnaire. Complete a free “Investment Checkup.”

What is the answer you get?

The answer from ANY of these services is ALWAYS to invest.

ALWAYS.

There is no Plan B, no backup option, no alternate strategy.

There’s no, “You really should first pay off your high interest credit card balances.”

No, “You should save up an emergency fund where you can access the money quickly.”

No, “You should create a will and advance medical directives first in case something were to happen to you.”

But ask automated investment services a question 100 times, “What should I do with my money?” and the answer is always going to be the same:

Invest in a diversified portfolio of low cost ETFs.

It’s the only answer these services have. There’s nothing else.

It’s not financial advice. It’s not wealth advice.

It’s barely investment advice.

It’s an investment recommendation. The output of a calculator.

Sophisticated or not, automated investment services are ALWAYS going to recommend investing your money.

There simply is no other result to offer. The algorithms today are incapable of suggesting anything but investing.

So Why Robo Advisor?

So why robo advisor as a moniker?

Because it is a oxymoron, a name that contradicts itself.

Algorithms, software programs, aka “robots” are incapable of making judgment calls and evaluating emotions or feelings in the calculation process.

Robots can’t give advice.

Robots can only decide based on ones and zeroes. True or false.

Sure, an algorithm’s answer can be associated with a level confidence (recall IBM’s Watson playing Jeopardy), but each discrete answer is associated with a level of confidence based off of a set of discrete factors evaluated in the calculation process.

An algorithm’s output is a result. Functions return arguments.

But don’t call that advice.

Know What You’re Getting

As with most decision-making processes, there’s often a big difference in what you can do and what you should do.

What is important to you? How does a decision make you feel? How do you prioritize your goals?

Can your entire life, your goals, your dreams, your aspirations be captured in a four question survey? A ten question survey? Even a hundred question survey?

For automated investment services to survey the market and say “Hey, we can improve investing outcomes by building a software program that does everything on the cheap!”

The questionnaire is only part of the advice process, it is not the start and finish.

And then there’s the talk of disruption, mainly coming from the media (I don’t recall any of the automated investment services specifically saying they intend “to disrupt” the financial services industry).

What industry are automated investment services attempting to disrupt, anyway?

Vanguard, the mutual fund giant, has been offering diversified, low-cost investment products and services quite successfully since the 1970s.

Just remember that the next time you consider the services of an automated investment service, know what you are getting.

Do your homework.

You are getting the results of a calculator.

The calculator is programmed to give an answer.

Not advice.

Not from a robot.

Don’t assume that the answer you get is the best answer for your situation.

Who you are as a person cannot be summed up in an online questionnaire.

 

*Note: Personal Capital toes the line on the robo advisor definition. Users complete the Investment Checkup and receive a target asset allocation illustration based on answers to the short questionnaire. However, specific mutual funds and ETFs are not recommended, so it’s not explicit. Users do get a basic automated investment allocation recommendation with no human intervention, but it’s up to the user to connect each recommended asset to a specific mutual fund or ETF to purchase. Users who want specific fund and ETF recommendations must engage Personal Capital for traditional investment advice rendered by human advisers and pay Personal Capital’s standard fees. This formal engagement is not robo advice.