On Robos and Humans

Journal of Financial Planning: June 2015


Rick Ferri, CFA, is author of The ETF Book. He monitors the latest trends in index funds and ETFs. His research appears in major media outlets, and he is a frequent speaker on investing topics of interest to financial planners.

I’m told computers will make our business obsolete in the future. Financial advisers will lose relevance as people turn to their electronic devices for investment management and advice. This grim forecast has come about with the rise of so-called robo-advisers, new online financial advisory services created by high-tech entrepreneurs. 

Paraphrasing Mark Twain, I am here to say that reports of our demise have been greatly exaggerated for several reasons.First, the robos’ assets have not grown in proportion to the media hype and the venture capital (VC) money spent to promote them. Second, robos make my job easier because they help educate the public on the benefits of low-cost index fund investing. Third, the market for human advisers is baby boomers and their parents—not millennials just yet.
Wealthfront launched about five years ago as KaChing, a Silicon Valley startup seeking to commoditize high-end active management strategies. The idea attracted a couple hundred million dollars in AUM before the company pivoted 180 degrees to index-based ETF portfolios. Since then, Wealthfront has attracted more than $2 billion in AUM. 

Wealthfront ran in-person marketing seminars up and down the West Coast as they targeted young workers in the tech industry. The strategy worked. Face-to-face selling of financial adviser services is something the Internet cannot replace, even for this high-tech crowd.

Betterment—also VC funded—similarly targets young investors who dollar-cost-average into a portfolio of ETFs. Betterment has captured more than $1 billion in AUM.

Wealthfront charges a 0.25 percent management fee. Betterment charges 0.15 to 0.35 percent in management fees. Assuming both companies combined earned 0.25 percent on $3 billion in AUM in 2015, total revenue would be about $7.5 million in 2015. 

The two largest robos have been around for five years, are VC funded, have been promoted heavily in the media, and do extensive face-to-face selling even though they don’t like to admit it. All this has resulted in less than $8 million annually in revenue. That doesn’t seem like much given all the attention being paid to this small slice of the industry. Are these companies really going to put us out of business?

Robos have carved out a unique business model and are becoming more relevant, but they have huge challenges ahead. None has experienced a bear market, so we don’t know how many clients will defect when one occurs. Competing products are coming in from all directions—like the no-fee (but not free) Schwab Intelligent Portfolios and Vanguard Personal Advisor Services. Also, when young clients with small accounts become middle-aged clients with larger accounts, many will leave the robos and seek the solace of human advice.

With that in mind, human advisers who adhere to low-cost passive strategies should see the robos as fertile training ground for future clients. They’re educating young people on the benefits of low-cost index fund and ETF investing. 

John Bogle, founder of the Vanguard Group, isn’t an ETF fan. “[It’s] like handing an arsonist a match,” he once said. Yet, the popularity of ETFs has done more to spread Bogle’s message of low-cost index fund investing than any other thing in the past 25 years. I feel the same way about the robos. 

Teaching a philosophy of low-cost passive investing to young people isn’t cheap or easy, and the robos’ efforts are to be commended. These efforts are good for the future of my business as these ready-trained young investors accumulate wealth and seek human advice when the time comes—and it will come. 

Money can be complicated. When things get complicated, people turn to others for help. Instead of a shortage of clients for human advisers, I see a shortage of quality advisers to service an overwhelming number of people who need help today. Advisers who put their clients’ interests first will find plenty of work. 

The robos will complement the market for human advisers. The demand for quality advice is increasing as baby boomers enter retirement age and trillions of dollars in wealth transfers between generations. Millennials will seek our guidance when it’s their turn.

Investment Planning