Wealth Advisory 2.0

Originally published on the Wharton FinTech blog on September 18, 2014.

Online platforms are making it easier to invest your money. But are they making it better?

What a difference a couple of years makes. Perhaps no other part of the FinTech industry has made more progress in the last 24 months than online wealth management. Where once there were none, now there are many. Where once there was little investment, now it seems like VCs can’t get enough. And, most importantly, customers are getting on board. Take industry leader Wealthfront for example. Since launching in December 2011, they recently reached $1 billion in AUM, years faster than other previous market innovators like Vanguard or Charles Schwab.

Estimates vary on the total number of Americans using these platforms, but it’s safe to say there is a real groundswell occurring and it’s hard to envision anything that would cause it to relent. You know you’ve reached an inflection point when all the offline service providers want to do is bash you. So has been the case recently. You can’t talk to a registered investment advisor (RIA) for more than a few minutes these days without words like “robo-advisor” being tossed around pejoratively.

Here we break down the major players in the market and see what they’re collectively doing well and where they still need to improve.

The Market Landscape

LearnVest ($69 million raised to date)

• Was originally focused on providing advice to women, but is now gender agnostic.
• The company uses a 7 step plan to get your entire financial picture in order. It includes advice on how much to save and where to cut back on spending, so arguably a more comprehensive solution than what their competitors offer.
• CEO Alexa von Tobel has written a book and is working hard to build an offline presence

Wealthfront ($66 million raised to date)

• Entirely technology driven and with the lowest fees (0.25% of AUM plus 0.15% average ETF fee).
• Uses algorithms and low cost ETFs to cheaply and efficiently manage portfolios.
• Burton Malkiel (author of A Random Walk Down Wall Street) is an advisor.

Personal Capital ($54 million raised to date)

• Freemium model. Non-paying customers can upload all their account and get a mint.com-like experience. Actual asset management costs 0.89% of AUM for first $1 million and then declines from there.
• Paying customers are matched with a licensed financial advisor.
• CEO is Bill Harris, former CEO of PayPal.

Betterment ($45 million raised to date)

• Fees between 0.15%-0.35% depending on balance, plus 0.13%-0.16% embedded ETF fees.
• Focused on a really simple UI/UX and one of the first to develop a mobile app.
• Everything is automated.

FutureAdvisor ($22 million raised to date)

• Flat management fee of 0.5% per year, but ETFs used are almost entirely commission free.
• Investment decisions are software-based and difficult or impossible to override, so very similar to Wealthfront or Betterment.
• Built by team of software engineers with experience at PayPal and Google.

SigFig ($15 million raised to date)

• Don’t manage your money themselves. Instead, they use data analytics to understand the correlations across your different accounts and see where you have opportunities to lower fees by consolidating or going with lower cost strategies that have the same risk/return profile.
• Strategy is to work together with brokers like Fidelity rather than try to go around them.
• Service is free for customers, but some brokerages pay SigFig for sending them customers.

What They Do Well

Drive down fees: What ETFs did to actively managed mutual funds, these online wealth management firms are doing to brick and mortar financial advisors. Advisory fees for traditional advisors often range between 0.5%-2.0%. These new players are much less expensive.

Empower investors with an intuitive UI/UX: As recently as five or ten years ago, managing your finances involved a sea of prospectuses, paper statements, and confusing in-person meetings with your advisor.

These firms are changing all that using design and technology. They’re rooting out complexity from a market and helping you understand how your money is being invested.

Data and Transparency: Ask your traditional advisor what their one, three, five or ten year performance has been and you probably won’t get a quick answer. These new companies are making it crystal clear how well they do and how much of your money they make along the way.

Using Behavioral Finance: Getting people to save more and invest responsibly is often more of a psychology challenge than anything. These companies, notably Betterment, are using behavioral finance to nudge users into more cost effective and sustainable habits.

How They’ll Have To Improve

Establish more trust and credibility: The leading companies have already made great strides to build consumers’ trust, but there’s certainly more work to be done. Wealthfront’s strategy involves featuring famous investor Burton Malkiel prominently on their website and in press releases. They also show customers from leading tech companies on their homepage as a form of social proof.

Personal Capital’s approach is slightly different. Their CEO, Bill Harris, has been prominent in giving interviews and appearing at conferences. The approach they seem to be using is casting themselves as a hybrid between humans and machines. Their vision appears to be to develop a tech-enabled solution that can be tailored by real advisors, rather than a solution that is built strictly around algorithms. Personal Capital also likes to talk about its custodial arrangement with Pershing Advisor Solutions (a subsidiary of BNYMellon), which is still much more of a household name than Personal Capital.

Crossing the chasm and going more into the mainstream will involve building even more trust amongst average Americans.

Become full suite solutions: Asset classes beyond stocks and bonds are mostly outside the scope of the current market participants. Expanding beyond the existing asset classes is almost certainly part of the product roadmap, but questions remain about how quickly and effectively these companies will be able to do that.

For example, these platforms don’t currently offer insurance products like life insurance or annuities. Investments and insurance are an artificial distinction and the online wealth advisors have an opportunity to create comprehensive solutions and better outcomes for consumers.

Allow for More Customization: What many of these companies will tell you today is that once you tell them the basics like your age and risk appetite, they know the best asset mix for you. There’s some truth to it, but many consumers also get uncomfortable when they’re told they have to follow what feels like a one-size-fits-all approach. These firms make higher margins if they can push people into fewer profiles, but it may be at the expense of expanding market share and really entering the mainstream.

Conclusion

As these online wealth advisors become even more sophisticated, they will continue to take market share for years to come. In many ways, these startups have the possibility to not only lower costs, but also improve upon the experience and use data to drive better advice.

Current target customers might be just millennials and tech company employees, but it’s hard to imagine how these solutions won’t be catering to the masses in the very near future.

Ready. Set. Invest!

Disclosure: I am a Personal Capital customer and a happy one at that.

Matt Carey is a second-year MBA student at The Wharton School, Co-Founder of Abaris, and a Co-Founder of Wharton FinTech.

Originally published at www.whartonfintech.org.