Asking a Computer to Manage Life's Big (Financial) Questions
WHY YOU SHOULD CARE
Computers are making high-quality financial advice available for a fraction of what it used to cost.
By Steven Butler
Sheryl Garrett spent years building her own business — giving people financial advice and charging by the hour. And then she set out to establish the Garrett Planning Network of financial planners, essentially a mutual help group of more than 300 men and women in the same business. It has flourished, and even President Barack Obama found time this year to praise Garrett by name as one “of a whole lot of financial advisers out there who do put their clients’ interests first” — and not one of those “gunslingers of the Wild West.” But are these Lone Rangers of the financial business about to be challenged by a really smart robot? “I expect that to be realized in the next five years,” Garrett tells OZY.
The invasion of the financial robo advisers is already underway. Computers might not be able to serve up all the advice people need — not yet, anyway — but they are quickly driving down the cost of putting finances on a steady path by constructing low-cost investment portfolios in response to just a few simple questions. In some ways, the launch of robo adviser “intelligent portfolios” by Charles Schwab, the discount brokerage powerhouse, in March put an imprimatur on the trend — and pulled $2.3 billion into its program in just two months, with 20 percent being new customers. “The rapid growth surprised us,” says Naureen Hassan, Schwab’s executive vice president who runs the program.
Schwab’s entry seems to have only generated more interest in this corner of the market. “We’ve grown much faster since the Schwab launch,” says Joe Ziemer, a spokesperson for robo adviser Betterment, which now oversees $2.2 billion in assets. Vanguard, the pioneer of cheap index-fund investing, also got into the act, launching a program that pairs in-house, live human advisers with its own computer analysis for a relatively low fee of 0.3 percent of assets, maybe a third of average adviser fees.
With more than a dozen firms out to grab your money with robos, figuring out which one fits the bill is just getting harder.
But these programs are just warming up for a future that promises to be even more techie, as the gap closes between automated investment management and highly personalized financial planning that’s typically delivered by a person, and cheaper. Robo-adviser Wealthfront, for one, has introduced a way to boost returns that would have been unthinkable a few years ago without steep fees. Until now, investors could easily buy into a cheap index fund that held all stocks, for example, in the S&P 500, giving them an instant, highly diversified, low-cost portfolio. Yet if individual stocks in the indices fell, they couldn’t be sold to harvest the losses, which otherwise could, within limits, be deducted from income at tax time.
So San Francisco-based Wealthfront sets its computers to buy up to 1,001 components of the indexes for individual accounts. When losses appear, computers sell the stocks and replace them with similar investments. Voilà: a roughly 2 percent annual increase in returns, according to the company’s calculation. While the minimum for the program, at $100,000, may seem high, it nonetheless makes available a service, included in a standard .25 percent management fee, that until now only the very wealthy could contemplate. “We’re at the very early stages of this technology,” says Adam Nash, Wealthfront’s CEO, who’s got his eyes squarely on millennials, which make up 60 percent of the firm’s clientele.
Across the country, in New York, Betterment has taken a different bite out of the adviser’s apple. If someone sets goals for the big inflection points in their life — marriage, kids, college, whatever — they’ll have the chore of managing different piles of cash. Betterment allows clients to set up various investment strategies for different goals in a single account. Behavioral finance theory suggests investors have an easier time sticking with the program when they have concrete goals in mind, and Betterment has also begun to crack one of the hardest nuts: helping retirees to develop a sustainable spend-down plan after they stop working.
But this space is getting crowded. With more than a dozen firms out to grab your money with robos, figuring out which one fits the bill is just getting harder. Nash and some other competitors slammed Schwab for its plan, especially for including a significant allocation of cash, but Hassan says Schwab stands by the program as best for investors. Meanwhile, Garrett calls Vanguard’s 0.3 percent annual fee “excessive” for most people, and buried deep on the company’s site is a free asset allocation program. Just input some simple information and it will spit out a model portfolio of low-cost index funds. John Woerth, a Vanguard spokesperson, says the personal adviser program is good value for individuals without the time, willingness or ability to manage their own investments. Still, it raises the question of whether individuals need to pay for any of this.
For now, real people are hanging on as part of the equation. “We don’t see Betterment as a replacement for advisers, but as an enhancement,” says Nick Gavronsky, product manager at Betterment. And even Garrett thinks the robos, at least for now, are good for her business. “I’m thrilled by the robo-movement,” she says, for the same reason she says that TV personality Suze Orman has been great for business. All the publicity that Orman’s drummed up, whatever some think of her advice, has just made people realize they’ve got a problem. “People need hand-holding,” says Garrett.