Several venture capital companies are betting millions that investors are fed up with Wall Street’s conflicts of interest, bad advice, excessive expenses and lack of transparency. They believe the era of the online investment website has arrived. I’m not talking about websites that want to replace the discount brokers, such as E*Trade—these sites want to replace Merrill Lynch and Morgan Stanley. Are they a viable alternative?
Let’s look at the three main contenders: Future Advisor, Personal Capital and Wealthfront.
Data Aggregation
All three sites boast technology that allows investors to view and analyze all their financial accounts in one place. Each website can download data from any online account. This isn’t a new technology—Fidelity offers it, for example—but some of these aggregation tools are particularly powerful.
Investment Algorithms
All three websites tout sophisticated algorithms that they use to allocate assets. They rely on technology to develop portfolios rather than the input of expensive investment professionals (though paying clients of Personal Capital work with an actual wealth advisor). All three sites use varying combinations of index funds, ETFs and low-cost mutual funds for the investment of client assets.
Reduced Fees
Lower fees are a big part of how these sites say they beat traditional portfolio management. Wealthfront has a $5,000 minimum asset requirement with the first $25,000 of assets free, after which it charges a 0.25 percent fee on assets. FutureAdvisor says investors will save up to 80 percent of what they would spend on a traditional financial advisor and portfolio; the site will even help users replace overpriced investments with cheaper alternatives that deliver the same performance. Personal Capital offers its technology for free, but clients who want to work with a wealth advisor pay management fees of under 1 percent of AUM.
Too Good to be True?
If these optimistic scenarios sound a little, well, overly optimistic, it’s because they probably are. Here’s why:
• All three sites want investors to believe that their algorithms deliver superior results—but they don’t provide any actual proof, like an audited, Global Investment Performance Standard compliant track record.
• All three websites lack transparency. They do not disclose, for example, their assets under management or the number of investors who use their services.
• Personal Capital says investors have access to online advisors, but the site fails to disclose their credentials. My bet is that Personal Capital is employing junior advisors who are paid much less than more experienced professionals.
Younger Investors
These sites aren’t likely to attract older, high net worth investors with long established relationships with wealth managers. Instead, they’re looking for younger clients, particularly tech-savvy Silicon Valley investors, for whom conducting business online is the norm. And they’re right: Young investors who don’t already have advisors may embrace these variations of “black box” investing. But older investors, who may have been burned in the past, will be more skeptical.
I also think it’s unlikely that investors with substantial assets are going to give up the personal touch their advisors provide. They often rely on those advisors to hash out financial goals, family issues and other personal matters; it’s hard to see a website or an advisor at the other end of a computer screen playing that intimate role.
My guess is that Wall Street will watch these sites carefully and cherry-pick their most successful strategies. That evolution will certainly change the role of the financial advisor—but not eliminate it.
