Rise of The Robo Financial Advisors? by Attain Capital

Forgive us for stealing from the cover of the Economist, but given the topic it seems fitting. Ever since the major technological advancements of the 20th century, there’s been a growing fear that soon enough robots will control the world (cue the Terminator franchise). Fast forward to today, and this fear has creeped into the financial advisor space of all places, with articles using  words and phrases like “afraid” & “risk irrelevancy” to display the attitudes and dangers all advisors face if they don’t adapt to the shifting mentality when it comes to investing. What are we talking about? And what is a robo-advisor anyway?  Why are people supposedly fearing it?

Who are the Robo Financial Advisors?

Just like Amazon.com, Inc. (NASDAQ:AMZN) ruined Borders and the local bookstores, Netflix, Inc. (NASDAQ:NFLX) killed Blockbuster, Facebook Inc (NASDAQ:FB) killed talking to your friends, and Tesla ($TSLA) is trying to disrupt the big auto-makers; the whole idea behind Robo Financial Advisors is to disrupt the financial advisor space with new technology and lower costs:  mainly algorithms instead of advisors; websites instead of branch offices, and automated text messages instead of hour long meetings. A few leaders have emerged so far in the space, with names like Betterment, Wealthfront, and FutureAdvisor, and a quick view of their websites will show essentially the same message:  ditch your father’s golfing buddy and invest like it’s the 21st century, with easy, intuitive tools to set things up and automated processes after that so you don’t have to worry about it. 

Why is Everyone Talking about them Now?

It’s the financial equivalent of booking an Uber on your phone versus standing in the cab line at the hotel. And it’s gone beyond the idea stage to real money. Wealthfront launched in December of 2011 and in those 30 months, they have been grown to $1 Billion in AUM, which is roughly an average growth of 33.3m a month. Betterment is doing well too, with $502 mm in assets under management. As for FutureAdvisor, they now have over $118mm AUM, with only 18 employees.  And the Venture Capital folks are falling all over each other to get in on the game wondering if this is the next Twitter or Facebook or whatever, pumping over a quarter of a billion into the space, and $95 million in just a few weeks earlier this year.

Bo Lu, the CEO of Future Advisor had this to say about the size of the opportunity

“There are 32 million mass-affluent Americans-with assets between $100,000 and $1 million-and only 20 percent have an advisor. Sixty percent of families with more than $1 million in investable assets already work with a financial advisor. Eighty percent of our clients never have had an advisor. No ecosystem has ever served these people. That’s a big gap that’s artificial and made by economics. We want to bring the penetration up to where it is for affluent, and that is a 14-million-household opportunity.”

This strategy has certainly captured the attention of Ron Carson of Carson Wealth Management Group which manages $1.9 Billion. Carson says these robo-advisors are causing him to lose business.

“My margins have shrunk considerably,” he said, “and I’ve got a big business compared to the average size of an RIA.”

Who are the investors interested in this?

The quick answer is anyone who likes twitter better than reading the newspaperanyone who books their dinner reservation via open table instead of calling the restaurant. Their mainly younger generations, but we would guess it’s more their tech saviness instead of their age. The tech savvy and app friendly think, research, and act on most situations vastly different from the past. This is true when it comes to making any financial decision as well. The question boils down to how investors want to interact with their advisors. Would you rather have 24hr access to statements, positions, fees, and other account information on your phone, or a professional who will sit down with you and guide you down an  investment path; which would you choose?

The tech savvy across generations (including the Millenial in our office) would more than likely pick the first option; where older generations might choose the second option; enjoying the relationship and small talk about the house, kids, and dog. From our in house Millenial:  “the last thing anyone I know wants is to have someone call them to small talk. Millennials grew up in an age where they only time they want to talk on the phone with a business is when they’re their complaining about a product or service (while writing a bad review on in the app store, Yelp, Facebook).”

While some advisors believe these robo-advisors are just a fad, in a recent Investment News article appropriately titled, “Why Ron Carson is afraid of robo-advisers,” Carson said he’s afraid of these robo-advisors because of debate over how people want to access their financial resources. 

InvestmentNews: This week at a conference for advisers, you asked people to raise their hands if they were afraid of robo-advisers. By and large, the answer was no: only a handful of people raised their hands. What about you? Are you scared of robo-advisers?

Mr. Carson: Absolutely. It’s a real threat because of the increasing demand and the desire to serve that demand. They’ve attracted a lot of smart money to that industry. And they’re figuring it out. I was at a conference and a couple of advisers sat on stage and they said: “It’s no real threat. These kids, they think they want to use a technology platform. But they’re going to want a human being in the end.

I don’t think so. I mean, on our consumer panel, these young kids said: “I want my information 365 days a year. If it’s 3:30 on Christmas Eve, I want to know how I’m doing. I want the latest information on it.” And most of us are not providing that to them right now.”

Betterment and Wealthfront are appealing to this millennial mentality in which investors don’t want/need to talk on the phone about their financial planning. From the millennials perspective, since these robo-advisors are offering low to no cost ETF products in a 5-year bull market, there hasn’t been a need to talk to human advisor. It’s all been gravy and quite easy during their short tenures. You just buy index tracking ETFs and voila – everyone’s happy.

Is there a problem with this Business Model?

Now, not everyone is buying into this “evolve or risk irrelevancy” claim. Most of the advisors at the conference Carson was speaking at do not foresee these robo financial advisors as a potential threat. Most are likely heavily biased, however. But moving past people’s opinions, are there

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