People pay financial advisers thousands of dollars a year to pick investments, rebalance portfolios, adjust risk levels and minimize taxes. And these are all things that computers are learning to do more quickly, more reliably, at a quarter of the cost and with flashier graphics.
A funny thing is happening on the way to total automation, though. While new “robo-advisers” pop up regularly, many are relying on flesh-and-blood advisers. They're finding a human with a sophisticated computer system can be better at winning trust than an algorithm alone. That highlights the big question for investors and their advisers: How much is the human touch worth? At a time when 0.25 percent will build a perfectly adequate investment portfolio, advisers need to justify fees that can top 1.5 percent.
Betterment is the most recent “robo-adviser” to offer a hybrid product. Its service will be opened up to the almost 3,000 investment advisers that are clients of $2-trillion company Fidelity Investments. They’ll pay 0.25 percent of assets if they choose to use Betterment-designed portfolios of exchange-traded funds. They can also outsource their website design so that Betterment’s graphics appear under the adviser’s logo. Any amount an adviser wants to add on top of that 0.25 percent charge is up to them.
Traditional advisers get Betterment's more efficient platform, while Betterment gets the advisers' local marketing savvy. Winning over new customers is expensive for the new robo-adviser brands. "They're burning through millions of dollars in cash," says Celent analyst William Trout. Financial advisers still have an advantage in winning the trust of people in their hometowns.
Fidelity’s move comes in the wake of an adviser service launched by Vanguard Group, and expectations of another one from Charles Schwab Corp. (SCHW). Vanguard charges 0.3 percent for its new adviser service. Clients answer an online questionnaire and are assigned a portfolio. Then, on the phone with a Vanguard adviser, they can adjust that allocation and ask questions. The service, in a pilot phase, now takes anyone with $100,000 or more. Within a year, its minimum investment is expected to drop to $50,000, says Vanguard spokeswoman Katie Henderson.
These are basic plans. Rich clients still need to pay up for full-service human advisers who can help with estate planning, taxes or other complex topics -- at least for now. But digital tools are only getting more sophisticated, Trout says. And, he says, clients are realizing “they don’t need wood paneled offices to impress them.” Some cool graphics and a simple portfolio can serve much the same purpose.
More stories by Ben Steverman:
- Don't Treat Small-Cap Stocks Like a Fashion Statement
- An Investor's Guide to Fees and Expenses 2014
- You're Not a Piñata. Find a Financial Adviser Who Knows It
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