Third Generation Robo-Advisors Are Born
On March 31, Wealthfront announced its 3.0 model. Wealthfront is a leading robo-advisor, or online automated personal investment advisory platform. To launch version 3.0, the company’s design and engineering teams have remodeled the service to accommodate artificial intelligence and APIs for account aggregation.
Wealthfront 3.0 heralds a new phase of robo-advisory that delivers even more personalized and sophisticated advice and that participates in the rise of the application of artificial intelligence to financial services.
According to its blog, by connecting with APIs, Wealthfront 3.0 integrates popular consumer fintech apps Venmo, Redfin, Lending Club, and Coinbase. It also connects to external bank, brokerage, and mortgage and loan accounts. A customer’s ability to holistically view her full financial situation remedies a notable weakness of first and second generation robo-advisor models and is a remarkable development.
Robo-advisors with aggregators can be a one-stop shop for “digital native” generations to view and manage their personal finance.
Betterment, another leading fully automated robo-advisor, also launched a comprehensive account aggregation capability earlier in March. It allows clients to sync outside accounts, including mortgages and loans, at an astounding 13,000 different financial institutions. Within the same month, the two leading robo-advisor start-ups were joined by Vanguard Personal Advisor Services (Vanguard’s “hybrid” human-digital robo-advisor).
The three companies have followed Personal Capital and SigFig, which for years stood out by having aggregation capabilities. Thus, comprehensive account aggregation is now a mainstream robo-advisor feature, bucking a key deficiency. Further integration should not be far off; for instance, robo-advisors could integrate with external retirement accounts and payroll transactions.
By providing total integration, robo-advisors mend the fractured personal finance experience and deliver a solution much broader than investment management: they deliver a complete financial management platform.
Artificial intelligence and account aggregation will operate synergistically to be the most powerful development of third generation robo-advisors.
The application of machine learning to robo-advisory is still in inchoate stages, and only a few firms have stepped forward describing plans.
Little-known Marstone (which focuses on business-to-business advice) has partnered with IBM Watson to deliver some form of cognitive-computing powered advice. It appears that Wealthfront will use artificial intelligence to provide more data-driven and personalized investment recommendations on its Dashboard. Personalization will be dynamic and driven by the client’s specific risk tolerance, financial profile, and investments as assessed across aggregated accounts.
Machine learning in robo-advisory may also analyze, adapt to, and learn from investor behavior and correct for cognitive biases. As Wealthfront states, “observed behavior may reveal insights about ourselves that we aren’t even consciously aware of.”
First generation robo-advisor start-ups targeted millennials, featured rock-bottom prices and investment minimums, and automated core financial advisory services like asset allocation, fund selection, and tax-loss harvesting.
Second-generation robo-advisors honed and improved these services. In this era, the sector also saw competitive response from established financial advisors (Vanguard, Schwab, Fidelity) and asset managers (BlackRock and Invesco), who broadened the target market to the mass affluent and high-net-worth across age groups, paired financial advisors with digital tools to create the “hybrid” advisor, and tiered service and pricing options.
In the third generation, robo-advisors are expanding the market further by entering 401(k) management (e.g., Betterment’s new Betterment for Business), while established banks and asset managers are aggressively grasping for footholds through acquisitions and partnerships (e.g., BlackRock acquired FutureAdvisor in August 2015 and recently expanded its reach overseas by partnering with a German robo-advisor to distribute its iShares ETFs).
Importantly, in the third generation, robo-advisors are sprinting up the quality curve and addressing current deficiencies such as limited account consideration and personalization by integrating external accounts and laying the foundation for artificial intelligence.
