The New York Times | DealBook, November 18, 2015 article: "A Flurry of Growth in the Online Financial Advice Field" [Review of growing competition to provide automated investment advisory services]

Source: The New York Times | DealBook, November 18, 2015 article

A Flurry of Growth in the Online Financial Advice Field

By LIZ MOYER NOV. 18, 2015

As the competition among so-called online robo advisers intensifies and more entrants crowd the field, some of the oldest firms in the niche are increasing their efforts to recruit investors.

Personal Capital, led by the former PayPal and Intuit chief executive Bill Harris, lowered its account minimum to $25,000 from $100,000, a big shift for the six-year-old San Francisco firm, which originally focused on an older, more affluent market.

At the $25,000 minimum entry point, Personal Capital will be able to attract a younger, less established demographic, Mr. Harris said in an interview. That includes the same young people who are being aimed at by other start-ups like Wealthfront, which recently dropped its minimum to $500 from $5,000, and Betterment, which has no minimum.

More traditional financial services companies are introducing their own online and digital-only advisers. A former Bank of America and Citigroup executive, Sallie Krawcheck, and Charlie Kroll, a tech entrepreneur, registered their Morningstar-backed online adviser, Ellevest, in September. Bank of America Merrill Lynch is developing an automated portfolio management function for its Merrill Edge platform, and BlackRock said in August it would buy the San Francisco start-up FutureAdvisor.

Jeff Davis, director of advisory sales at the online financial adviser Personal Capital, on a video conference. Credit Andy Cross/The Denver Post, via Getty Images

Digital advisory firms will have $53 billion under management by the end of the year, up from $16 billion at the end of last year, according to estimates from the research firm Aite Group, still a small sliver of the $20 trillion wealth management market. But their presence is threatening to destabilize the traditional wealth management business, in which advisers charge 1 percent annually or more based on assets under management. Digital firms often charge 0.5 percent or less. Generally, their advice is automated, based on mathematical algorithms, and does not involve direct conversations with actual human advisers.

A report by Citigroup analysts estimated the digital advisers would have $5 trillion under management within the next 10 years.

At a conference earlier this month, Morgan Stanley’s chief executive James Gorman, said automated portfolio management, or robo-advising, is a useful tool but is not going to replace human advisory services. “If places like us don’t have that capability, we should have that capability,” Mr. Gorman said. “Whether we build or buy, we should have it.”

Personal Capital is trying to get more of the 850,000 users of its free portfolio analysis software to sign up to have their money managed by the firm. Its selling point is its hybrid model that offers access to advisers by phone or online, something firms that just focus on managing automated portfolios do not offer.

The firm has about 6,000 customers for its paid advisory services and a total of $1.6 billion under management. But Mr. Harris said he believed about half the 850,000 software users would qualify for the lower account minimum.

Low minimums, low fees and the ease of setting up an account and financing it have been the selling point of the purely automated firms, helping them to appeal to investors who don’t have the time or interest in building an investment portfolio on their own.

Wealthfront in San Francisco has $2.6 billion under management and 37,400 customers, according to Aite Group, while Betterment in New York has $3 billion under management and 118,000 accounts.