Robo-Advisers: How The Industry Is Shaping Up

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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 retirement planning 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 regulators.

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 planning firm.

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 far less.

Compare Features

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 portfolios.

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 68."

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 said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Mutual Funds

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