Journal of Financial Planning: December 2014
Rick Ferri is author of The ETF Book. He continually monitors and evaluates the latest trends related to index funds and ETFs. His research appears frequently in many major media outlets.
First there was Betterment and Wealthfront. Then, FutureAdvisor, WiseBanyan, and other automated RIAs came along with online asset management solutions. Now, with the help of new tools and services, any financial adviser can create a low-cost online portfolio management solution and be a “robo-adviser.”
Robo-advisers provide automated online portfolio management services with little-to-no human assistance. The tools mimic the portfolio management processes widely used by human advisers, including risk assessment, asset allocation, security selection, account opening, asset transfer, implementation, reporting, cash management, rebalancing, and billing. The services commonly range from 0.15 to 0.50 percent.
If you feel overwhelmed or threatened by this new technology, don’t be. Not only will these robo-services save money by reducing the time and cost to service existing clients, they create opportunity to expand into smaller accounts that were previously impractical.
Betterment recently launched an institutional B2B product aimed at advisers, making its technology and ETF model portfolios available through private label portals. A potential client signs on to the service directly without talking with an adviser. The program offers some flexibly in the Betterment ETF models and soon advisers will be able to create their own models.
Betterment’s services were first to the market and should draw significant interest; however, I see two potential drawbacks. First is custody. Betterment is an RIA and Betterment Securities is a broker-dealer. They custody client accounts and clear through Apex Clearing Corp. Betterment recently announced a collaboration with Fidelity, whereby Fidelity will educate, provide information, and refer its RIAs who want to try digital investing to Betterment. The limit on where assets go to be custodied can be an issue for advisers who custody elsewhere. The second drawback is they offer only ETF portfolios. Many advisers use a mix of traditional open-end funds and ETFs, and an all-ETF portfolio may not be their most desirable choice.
Mark Twain said, “If you don’t like the weather in New England now, just wait a few minutes.” Robo-adviser technology is the same way. Several new companies are rushing to fill the B2B robo-adviser role. They’re offering flexible custodian relationships and customizable portfolio models to include all types of securities.
Upside is one firm offering a robo-adviser platform for all. They’re an RIA who acts as a sub-adviser to other RIAs. This means they’re a fiduciary and can execute trades with discretionary authority for RIAs who want a hands-off approach. They offer extensive portal integration with existing websites to provide automated trading. Advisers create their own model portfolios and can include ETFs, mutual funds, and individual securities. Upside is available through TD Ameritrade and Shareholders Service Group (SSG), and is reportedly working to sign up Schwab, Fidelity, and Pershing.
Trizic also offers B2B robo-adviser technology, including full front- and back-office functionality needed to execute an online solution. Trizic is not an RIA or a broker-dealer, so advisers will continue to execute trades generated by the software, Trizic Accelerator, which allows customized portfolios that may include ETFs, mutual funds, and individual securities. As of this writing, the service is available through TD Ameritrade. Fidelity is also looking at the product.
Several other firms entering the arena provide robust tech tools for assisting advisers. For example, Motif Investing offers sophisticated portfolio analytics, and Guide Financial offers advanced financial planning tools.
Charles Schwab plans to enter the B2B robo-adviser market as well. Schwab’s president and CEO Walt Bettinger said in October that the company would begin offering free automated investment plans picked by computer algorithms in the first quarter of 2015.
Robo-adviser technology is a game changer. Adopting this technology allows advisers to leverage their existing business by spending more time on value-added services and expanding their practice.