Inside the Robo-Adviser Wars
Different industries have different modes of competition. In some, it's all about price. In others, it's about quality. And in still others, it's all about how well you know your customers.
But in the young field of robo-advising -- automated investing services that let algorithms do the work of financial advisers -- it's apparently going to be all about how aggrieved your chief executive officer can sound in a long post he writes on the blog-publishing platform Medium.
Actually, it's not all about that -- price seems to be pretty important, too. But the aggrieved-post-on-Medium competition is for real, and for the moment Jonathan Stein of Betterment is winning. "In a marketing ploy designed to bait us to respond and thereby invite the press to pay attention to them," he wrote Tuesday, "Wealthfront made knowingly inaccurate statements about Betterment." He continued:
I have faith that careful readers and reporters will see Wealthfront for what they are: spin artists. I’m loathe [sic] to play this game, but my PR team insisted that I set the record straight.
Wealthfront is Silicon Valley's leading entrant in the robo-adviser wars. Its executive chairman and co-founder, Andy Rachleff, is a former partner at the venture-capital firm Benchmark and its CEO, Adam Nash, is a former LinkedIn vice president of product. Betterment is based in New York City, was co-founded by Stein while he was still in business school at Columbia, and more or less created the robo-adviser category when it opened for business in May 2010.
Betterment CEO Stein was responding to a Medium post from earlier that day, in which Wealthfront's Nash waxed aggrieved about monthly fees in general and the monthly fee that Betterment charges small investors in particular.
Betterment customers who have less than $10,000 in their account and don't sign up for an auto-deposit of at least $100 a month pay a monthly fee of $3. At that rate, Nash pointed out, "an investor opening an account at $100 would be paying an annual management fee of 36 percent in the first year."
Well, yeah, but who would open an account with $100 and then not keep adding money to it? Let's take a more realistic scenario where you put in $50 a month. Assuming no investment gains at all, that gets you to a 6.4 percent fee the first year, a 3.2 percent fee the second, a 2.1 percent fee the third, and so on. Those are pretty big fees, but (a) they're not 36 percent and (b) they decline rapidly as you put in more money. Writes Betterment's Stein:
The vast majority of these customers are in trial with us, and we want them to commit more of their assets to us. We believe in the power of behavioral finance, and reducing fees has been shown, by our own data and by many academic studies, to be a powerful motivator.
This sounds like a valid enough approach to bringing in customers who aren't sure at first how much money they can or want to commit. At Wealthfront, the rule had been that you simply couldn't open an account with less than $5,000.
The company dropped that minimum to $500 this week, which occasioned CEO Nash's Medium essay. Wealthfront also said it won't charge a management fee on accounts of under $10,000. That's a great deal for small investors. It's also a loss leader that could eventually leave Wealthfront saddled with a lot of small accounts on which it loses money, money it will have to get from somebody else.
That's the thing about fees. They're irritating, but they're also transparent. In fact, in a Medium post in March, Wealthfront's Nash tore into Charles Schwab for launching a "no-fee" robo-advising service that appears to make money by putting part of the funds in a low-interest-rate cash account and profiting from the interest spread.
That complaint actually does seem to have validity -- here's Schwab's response, which, in a telltale sign that the firm hasn't entirely bought into the robo-advising ethos, is not on Medium. But Nash couches it in language so sanctimonious as to be a little off-putting. An example: "I now find myself hoping we never lose our identity the way Charles Schwab has."
That's sort of the Wealthfront ethos. Its management ranks are peopled mostly with tech-industry veterans, and it positions itself as the antithesis of Wall Street. Its self-presentation is full of that supremely arrogant, we're-changing-the-world attitude for which Silicon Valley has become justly (in)famous.
Betterment has some backing from such old-line financial firms as Northwestern Mutual and Citigroup, and its management ranks are full of former Wall Streeters (albeit young, quanty ones). It too has had its moments of we're-changing-the-world obnoxiousness, but in general it presents itself somewhat more matter-of-factly than Wealthfront does.
You can probably tell by now that I find Wealthfront's rhetoric a little hard to take, but both it and Betterment offer what appear to be useful services. The fact that they're publicly battling over how low their fees are is a wonderful change from the investing environment of 15 to 20 years ago. Back then, it was all about superstar fund managers and how much they’d beaten the market by over the previous three years.
But these are also both venture-capital-backed firms that will be expected to turn a profit one of these days. They apparently plan to do that by harvesting large piles of money on which they will charge annual management fees for eternity.
At Wealthfront, the fee is 0.25 percent; at Betterment, it’s a sliding scale -- 0.35 percent if you auto-deposit $100 a month, 0.25 when your balance passes $10,000, 0.15 when it passes $100,000. Those fees are lower than what a human adviser charges, but they still add up -- and they don’t include the (modest) expense ratios on the underlying exchange-traded funds that your money is sitting in.
From yet another aggrieved Medium essay posted Wednesday by Blake Ross, who isn’t the CEO of a robo-adviser but is the former director of product at Facebook:
A 30-year old who invests $100,000 in his retirement with Wealthfront “for less than a night at the movies” will likely pay the company over $100,000 in fees by his 75th birthday.
That 30-year-old would do better, Ross argued, if he simply put his money in a Vanguard Target Retirement Fund (average expense ratio, 0.17 percent) and leave it there. Such target-date funds are the simplest and cheapest sort of robo-advisers; they rebalance and adjust the mix of stocks and bonds based on how many years are left till you retire. And at Vanguard, a nonprofit, customer-owned cooperative, fees have a long history of going down as assets under management grow.
At the for-profit firms that dominate the investing business, fees do not have a history of dropping like that except when direct competition from the likes of Vanguard forces them to. Maybe the fierce, priced-based competition among Betterment, Wealthfront and the burgeoning ranks of other robo-advisers will keep pushing fees down. A promoted Tweet showed up in my feed yesterday from newcomer Aspiration, which declared that “@Wealthfront and @Betterment are fighting over fees. We believe you should set your own fee.” (And yes, they appear to mean it. For now.)
Clearly, if competition among robo-advisers becomes purely about price, it won’t be a very good business to be in. But if it becomes a very good business to be in, it won’t be such a great deal for investors. The robo-advisers have to find ways to differentiate themselves even as they push costs lower. And for the moment, having the CEO write an aggrieved post on Medium appears to be one of those ways.
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