The Newest Threat to Robo Advisors

April 20, 2016

by Robert Huebscher

Today’s financial planning tools, including the new generation of “robo advisors”, have profound shortcomings, according to Dan diBartolomeo. DiBartolomeo says that the technology most advisors use suffers from serious problems – from prescribing a costly regimen of ongoing portfolio rebalancing to failing to incorporate a holistic balance sheet of assets and liabilities – and these problems are unwittingly depleting their clients’ assets.

DiBartolomeo’s company, Northfield Information Services, has introduced a new product, WealthBalancer, to address those shortcomings. DiBartolomeo is the founder and CEO of his Boston-based firm, and I spoke with him on April 14.

Northfield’s core business is in providing analytical tools to institutional investors. This effort extends the availability of its product suite to the advisor market.

“The problem we are trying to solve for investment professionals – mostly the advisor community, who deal with the range of household investors – is that most of the analytical tools they use aren’t very good,” diBartolomeo said.

Background

The genesis for WealthBalancer was in 2005, when the CFA Research Foundation asked diBartolomeo, Jarrod Wilcox and Jeffrey Horvitz to write a textbook on how managing taxable household assets is different from institutional money. “As you think about how a family evolves through time,” diBartolomeo said, “things change much more than institutions.”

Along those lines, he said, the “preference functions” of families are much more complex and nuanced than those of institutions. For example, households deal with a constantly evolving suite of financial needs, ranging from education expenses to retirement planning, whereas institutions have far more predictable cash-flow needs.

About six or seven years ago, diBartolomeo and Wilcox began to develop WealthBalancer, which he said has “the right mix of concepts and functionality to serve everyone from a traditional trust company to an RIA to a salesforce at an insurance company or a broker dealer.”

How it works

A WealthBalancer user enter three sets of information. First is the lifetime balance sheet, which contains a series contingent assets and liabilities. For example, a contingent liability might be the money necessary to send a child to a private school, but with the caveat that he or she might go to a public school instead. An example of a contingent asset is an inheritance of an uncertain amount.

WealthBalancer lays out all one’s financial needs and goals simultaneously and holistically. It looks at the whole picture and asks, “How much risk can this client afford to take?” This is not necessarily the same as what the client considers acceptable. Risk in this sense is measured by how leveraged one’s life is; it compares one’s household assets to liabilities to determine leverage.

DiBartolomeo said that this approach is unique in that it is analytical (not a “gut feel”) and it can be projected over time, showing how one’s risk varies over one’s lifetime.

Second, WealthBalancer understands asset allocation and asset location (i.e., whether a fund is held in a taxable or tax element account)

The third element is what diBartolomeo called “arbitrary preference functions.” Every firm has a questionnaire, he said, but the problem is that firms use the answers haphazardly. Using a scientific approach taken from the field of industrial engineering, WealthBalancer analyzes client responses to the questionnaire.

The firm running WealthBalancer sets up the questionnaire, which is completely customizable. It can be tailored to the type of investor. For example, the questionnaire can ask whether a client has a preference for socially responsible investing, plans to live abroad or has certain risk tolerance characteristics.

“What’s unique is how the math works behind the scenes,” diBartolomeo said.

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The Newest Threat To Robo Advisors

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