My Thoughts on Robo Advisors

My colleagues Tadas Viskanta and Felix Salmon have each written about the robo advisors who’ve been raising assets of late (albeit in very small portions, by and large). Wealthfront, Betterment, SigFig, Personal Capital and whichever one sprouts up next month all have slightly unique business models but, in general, they are offering professional-caliber portfolio management services to the masses and basically charging next to nothing.

For the investor, it’s easy to set up, cheap to maintain and relatively unintrusive on an ongoing basis.

Some thoughts:

1. I think the investment management styles these firms preach are reasonable and probably better than what most investors can do on their own. It’s nice to see a mass-market wealth management product or service that’s not out to gouge anyone or take advantage of the less savvy.

2. This can be a decent business but there’s probably not enough room for more than one or two of them. The race is on to scale up.

3. They are raising money a thousand dollars at a time. It will be tough for them to bring in a lot of large accounts because wealthy people know the value of having trusted accountants, lawyers and financial advisors working for them. They are glad to pay if it means personalized advice and being able to get someone on the phone. For the mass market, however, good human advisors are financially out of reach and lecherous brokers (who will sell a product to just about anyone) are not a good alternative. That is the space these robo advisors will be able to take over – and their true competitors are the online brokers, not traditional wealth management firms.

4. Fidelity or Schwab will probably buy one of these companies or will launch their own version to kill them all, if they see real traction (and profits) in the space.

5. All of these companies look as though they’ll become crazy-profitable on paper (and the VCs are probably convinced of this) but in the real world they are going to have to staff up substantially with human financial advisors and this costs a lot. Margins will be nowhere near projections.

6. The ready-made, disciplined, low-cost, hands-off portfolio model makes a great deal of sense in a bull market. So long as everyone’s statements show a chart moving from low-left to high-right, no problem. But in the next stock market downturn, many of the investors in these services will require some hand-holding and an email blast simply won’t cut it. As a result, behavior will be atrocious and there will be tons of selling out at exactly the worst time. Behavior is more important than fund selection and no one’s taking advice from a software algorithm in a panic. One bear market will reveal exactly what this business model is really able to cope with – my sense is that they’ll be hiring the same kinds of call center advisors and clerks that every other large financial firm needs. Or their investors will be hanging themselves, metaphorically speaking.

7. At the end of the day, those clients of the robo advisors who prosper most in life and business will eventually amass too much money and leave for a real human advisor. In this way, Betterment and Wealthfront will always end up catering to a relatively small median account size, no matter how well their portfolios do or how great their user interface becomes. It is a fact of life and an indefatigable feature of human history that people who’ve accumulated wealth – kings, princes, warlords, emperors, despots, businessmen, entrepreneurs, inheritors, lottery winners, executives, etc – will always seek out counsel, advice and assistance for the maintenance of their money and the continued assurance of their standard of living. In this way, even the most satisfied customers of the robo advisors cannot be counted on to stay past a certain point of asset accumulation.

Overall I think it is good that these firms exist and their services will be worthwhile for disciplined investors who don’t have a lot of money and don’t require much attention on an ongoing basis. But if I were an early-stage investor in these companies, I’d be asking myself about what the true addressable market size and opportunity is here, given the real-world limitations outlined above.

What are your thoughts?

Read Also:

The rising challenge of robo-advisors (Abnormal Returns)

How online investment advisers add value (Reuters)

 

 

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. lésbico commented on Aug 24

    lésbico

    […]Here are a few of the sites we suggest for our visitors[…]

  2. دوربین مداربسته commented on Aug 24

    دوربین

    Genuinely when a person does not be mindful of afterward its up to other viewers that they will support, so right here it takes place.

  3. prazdnici 16 oktjabrja commented on Aug 24

    prazdnici 16 oktjabrja

    […]below you will obtain the link to some websites that we feel you must visit[…]

  4. xmobile pro commented on Aug 25

    xmobile pro

    […]below you will find the link to some sites that we feel you ought to visit[…]

  5. خرید اکانت vpn commented on Aug 25

    vpn ایفون

    below are some hyperlinks to internet webpages that we url to considering that we feel they’re actually worth visiting

  6. games for pc download commented on Aug 25

    games for pc download

    […]just beneath, are a lot of totally not related web pages to ours, having said that, they’re certainly really worth going over[…]

  7. free download for windows 8 commented on Aug 25

    free download for windows 8

    […]please stop by the web sites we follow, such as this one, because it represents our picks in the web[…]

  8. discount promo commented on Aug 27

    discount promo

    […]one of our visitors just lately advised the following website[…]

  9. Adult SEO commented on Aug 27

    Adult SEO

    […]although web sites we backlink to below are considerably not related to ours, we really feel they are essentially really worth a go by way of, so have a look[…]

  10. Bvlgari commented on Aug 28

    Bvlgari

    […]Every as soon as inside a even though we select blogs that we study. Listed beneath would be the most recent sites that we choose […]

  11. Fendi commented on Aug 28

    Fendi

    […]always a huge fan of linking to bloggers that I appreciate but really don’t get a whole lot of link like from[…]

  12. Chloe commented on Aug 28

    Chloe

    […]we came across a cool web site that you may well enjoy. Take a appear in the event you want[…]

  13. 5 million website visitors commented on Aug 29

    5 million website visitors

    […]usually posts some quite fascinating stuff like this. If you’re new to this site[…]

  14. 123klussers.nl/stappenplannen commented on Aug 31

    123klussers.nl/stappenplannen

    […]although websites we backlink to below are considerably not related to ours, we feel they’re really really worth a go by way of, so have a look[…]

  15. how to use a vibrator commented on Sep 02

    how to use a vibrator

    […]below you’ll uncover the link to some sites that we assume it is best to visit[…]