June 18, 2015 12:04 am

Digital upstarts draw middle class investors with means

Beagan Wilcox Volz

User friendly: sites have won fans ©Dreamstime

Fuelled in part by a retirement system that increasingly puts the onus on individuals to safeguard their financial future, a growing number of US citizens are looking for professional help with their investments.

But many traditional financial advisers will not bother with clients who are not wealthy. Seizing upon this dearth of services for the middle class and mass affluent, dozens of start-ups in recent years have launched online, automated investment platforms, known as robo advisers.

While their models vary, robo advisers generally gauge an investor’s risk tolerance from an online questionnaire and then use algorithms to recommend an investment portfolio, often made up of low-cost exchange traded funds from giant asset managers such as Vanguard, Schwab and BlackRock’s iShares.

Robo advisers cost a fraction of the average 1 per cent fee of managed assets charged by flesh-and-blood financial advisers.

And, while financial advisers often require high minimum investments, robo advisers have a low, or no, required balance. Investors generally also pay the costs of the underlying exchange traded funds, which Wealthfront, the robo adviser, says is 0.12 per cent of assets on average.

The low prices and sleek, user-friendly websites, such as that of Betterment (the first pure robo adviser to earn a spot in the FT 300), which has been called the Apple of finance, have attracted thousands of investors.

Since launching in 2010, Betterment has grown to have $2.2bn under management, while Wealthfront, another US automated investment service, has gathered $2.4bn since its launch in 2011.

Eleven robo adviser start-ups polled last December by Corporate Insight, the researcher, were advising $19bn in assets, up 65 per cent from $11.5bn last April. Traditional asset managers have taken notice. “The big incumbents are playing catch-up,” says Bill Doyle, principal analyst at Forrester Research, who tracks robo advisers. “But the incumbents have the thing that everybody needs, and that is customers.”

Charles Schwab, the discount broker with more than $2.5tn in assets, launched its own robo adviser, Schwab Intelligent Portfolios, in March. The company has undercut its start-up competitors by not charging any advisory fees, commissions or account services fees. As with several other robo advisers, the minimum investment is $5,000.

Schwab can afford to give up these fees because it makes money from its own ETFs that constitute investors’ portfolios and from other ETF providers paying to gain access to the platform, as well as from investment returns from clients’ cash allocations.

The offering has grown to more than $2.2bn in assets and 30,000 accounts. More than 70 per cent of the clients are existing Schwab customers, says Naureen Hassan, head of Schwab’s robo adviser service.

Vanguard entered the fray in May, although the $3.1tn investment giant does not call its Personal Advisor Services a robo adviser, but rather a “hybrid” advice model. There is a big online component of the service, but 300 financial advisers are also on hand to help clients create a financial plan. The minimum investment is $50,000 and the fee is 0.3 per cent of managed assets.