The Internet devastated the record music industry and
newspapers. Now independent registered investment advisers wonder
if they're next.
So-called robo-advisers are the Web sprouts that RIAs are
keeping a close watch on. Robo-advisers -- also known as eRIAs --
package online questionnaires and calculators that lead to
investment plans for clients too busy or otherwise disinclined to
use human RIAs.
The plans are based on the same modern portfolio theory that
live RIAs use, though, of course, the results will vary.
Individual investors are taking note too. A growing number are
using them, figuring they've found an easier, cheaper way to get
reliable investment advice and management, for
or other goals.
Robo-advisers have amassed less than roughly $3 billion in
assets under management (AUM) in recent years, based on ADV forms
that large robo-advisers have filed with the SEC or state
That's a drop in the bucket compared with the $2.164 trillion
in AUM by all independent wealth managers, according to
riadatabase.com. Many are just ramping up and claim an affinity
with younger, Web-savvy investors.
But unless they can grow more, robo-advisers are likely in for
a shakeout. Many will fold because they haven't reached critical
mass, says Jason Gordo, CEO of FlexScore, an online financial
If eRIAs' average fee is 30 basis points, each needs more than
$1 billion in AUM to build and sustain a platform, pay staff and
pay back venture capitalists, Gordo says.
Wealthfront has just over $1 billion in AUM. Personal Capital
has $552 million. Betterment has $502 million. Other eRIAs have
Robo-adviser fees range from 25 to 95 basis points, according
to Cerulli Associates. Minimum initial investments can be as low
as $5,000. ETFs, because of their low costs, are the mainstays of
Human RIAs often charge 150 basis points, and require a
starting balance of at least $250,000.
An investor's portfolio is typically based on factors such as
age, time horizon, risk tolerance and goals, which the investor
inputs at a robo-adviser's website. To varying degrees,
robo-advisers rebalance and update portfolios.
One key distinction is that traditional advisers offer much
more customization of investments.
The Younger Set
Robo-advisers tend to appeal to Gen Y investors. "The average
age of our customers is 36, 37 years old," said Jon Stein, CEO of
Betterment.com. "The average at Merrill Lynch is closer to
Robo-advisers are best suited for investors who do not have
the time or interest to do investment research, who prefer not to
interact with a human adviser and who like to be able to manage
investments at any time of day.
"We'll get you a better return than you'll get on your own
because we're managing for tax efficiency, we diversify
intelligently and we rebalance," Stein said.
Some robo-advisers offer the option of talking with customer
representatives. And some robo-advisers offer additional
financial planning and tools. Betterment just unveiled a trust
management feature. "We make the trustee's job easier," Stein