The middle class has historically been underserved when it comes to investment advice. Account minimums, either from an investable asset perspective, or minimum investment fees, have been an obstacle for investors with smaller portfolios. A rather recent disruptive force in the financial planning industry is the rise of what's called "robo-advisers." These firms deliver advice on the web at a low cost, either for a flat investment fee or as a percentage of assets under management (AUM). Talking to a financial planning professional at a robo-adviser increases the cost.
Before the rise of the robo-adviser, firms like those in the Garrett Planning Network, formed in 2000 by Sheryl Garrett, served the middle class by offering advice with no income or investment account minimums where financial advisory services could be paid for on a retainer or a hourly basis.
One type of robo-adviser works on improving your asset allocation in your existing accounts and provides recommendations about when you need to rebalance your accounts. You're still driving the bus. The firm is providing directions, like a GPS unit. Other firms have you invest with them, often in exchange-traded funds (ETFs), and the firm invests the assets and rebalances as necessary. The more sophisticated packages consider the tax impact of your trades in making investment recommendations.
There's a distinction in the regulation of the industry between AUM and assets under advisement (AUA). As described by the Investment Advisor Act, "assets under management" means the securities portfolios with respect to which an investment adviser provides continuous and regular supervisory or management services.
Like any computer-driven model, it's the quality of the inputs that determines the quality of the output. Determining the client's risk tolerance, financial goals, tax situation and investment universe improves the portfolio recommendations.
The trade press in the financial planning world is abuzz with the impact these robo-advisers may have on the industry. A key distinction is the division between what clients pay for portfolio management, which the robo-advisers can do at a low cost and with high efficiency, and what clients are willing to pay for advice. The Wall Street Journal covered the topic well in its September 2013 report, "How to Get Investment Advice for Less Online."
I'm going to give the industry's senior statesman Bob Veres the last word. Writing in the March 2014 issue of Financial Planning magazine, he concludes his article with: "Ultimately, I believe the flesh-and-blood competitors in this gladiatorial arena will prevail, spilling silicon powder and machine oil all over the killing floor. But the online firms will have challenged the profession and ultimately forced it to evolve. Eventually, you'll thank them for it."
Full disclosure: I have an interest in how this all shakes out. I launched a fee-based financial planning shop this year with no account minimums, charging an hourly fee for my investment advice, with the idea that I can provide value added to a client relationship.
Are you ready to let a robo-adviser manage your portfolio? If you're already using one, do you like the results?
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