FIGHTING THE FEES
Robo-advisers win followers, if only for lower costs
The financial adviser who Michael Hansen had entrusted his life’s savings to became his friend over the five years he was a client.
They live in the same community and even attend the same church. But when Mr. Hansen took a hard, critical look at the bottom line of his account statement, he began to wonder if the five-figure management fee his adviser charged each year was really worth it.
“I would look at his returns and they would just be OK,” said Mr. Hansen, a 50year-old Gibsonia resident. “And I would look at how much money I was paying, and his fees were very, very, very expensive. I felt like I just had to go along with it.”
But one day last year Mr. Hansen was complaining to his mother, an avid investor, about the high fees he was paying on his investment account. She suggested he look into an online investment company called Betterment that markets itself as a low-fee alternative to traditional financial advisers.
“She told me a little about it and it sounded good,” he said.
While the fees and commissions charged by most traditional brokers and investment advisers may seem like an insignificant amount to pay for financial advice, those tiny 1 percent to 2 percent charges can add up over time — swallowing a sizable chunk of what investors would have ended up with at retirement.
Robo-advisers — which use computers to provide automated investment advice for clients — have been growing rapidly, although they still hold only a tiny share of the total financial services market. Yet many traditional advising firms worry about digital robotic advisers because they are feeding investors’ demand for lower money management fees.
Some of the most popular robo-advisers
— such as Betterment, Wealthfront and Charles Schwab’s Intelligent Portfolio — use exchange-traded funds to keep costs low. Betterment charges an annual fee of 0.25 percent of the account value. Wealthfront charges no fee for accounts $10,000 or less. Schwab’s robo-advising platform limits its fees to the operating expenses included in the ETF, which range between 0.07 percent and 0.21 percent of the fund balance. “Our clients manage most of their lives on their smartphones and are used to operating without needing to speak to anyone,” said Kate Wauck, a spokeswomen for Wealthfront, based in Redwood City, Calif. “They use their phones to find dates, order pizzas and banking. “We are providing them with a really easy way to use their phones to save, invest and plan for the future,” she said. “We don’t spend money on marketing. Our growth comes from our young clients referring us to others.” While clients have the ability to monitor a Wealthfront account via their smartphone, it can also be accessed with a desktop or laptop computer. Pittsburgh investors have access to robo-advice offered by the national companies that dominate the market. But other financial institutions are getting into the game, too. Citizens Bank, a Providence, R.I.-based bank that claims the third-largest deposit market share in the Pittsburgh region, introduced a new digital investment and advisory platform on its online banking home page in September. It allows customers to get advice on asset allocation and investment choices from a robo-adviser. A July report by S&P Global Market Intelligence predicts that digital advice assets will grow from $98 billion at the end of 2016 to $460 billion at the end of 2021. Nonetheless, robot-driven financial advising still represents only a small drop in a very large bucket. The Investment Company Institute estimates that registered investment companies as a whole managed more than $19 trillion last year.
Robo-advisers automatically invest client money in diversified strategies, using boundaries set based on an individual’s goals and risk tolerance. Mutual funds and exchange-traded funds are chosen based on what the algorithms and calculators decide is the best risk/reward profile for that client.
Jon Stein, CEO of Betterment, made the case that many financial advisers are often product salespeople who may not always have the clients’ best interest in mind.
“They are insurance salesmen,” he said. “They are brokers selling whatever makes them the highest commission and mutual fund companies who just want to sell you their mutual funds.”
He, of course, argues that his company’s system is better and less expensive. “We start with listening to the customer and understanding the customer’s goals. Then we build a plan and create a portfolio that best helps the customer reach his goals.”
He said robotic financial advice appeals to a broad swath of customers.
“Some of our customers are just starting out and a wealth manager may not be accessible to them,” Mr. Stein said. “We also have customers with millions of dollars coming to us because we manage their money for more take-home return at a lower cost.”
The company, based in New York, has $11 billion in assets under management and 215 salaried financial advisers and support staff to answer questions by either telephone or email. The company has 275,000 customers in all 50 states nationwide, including about 2,000 customers in the Pittsburgh area.
When Mr. Hansen decided in December to allow a computer to do his investing for him, he didn’t take any baby steps. He shifted all of his assets. That included a taxable account for longterm investing and an SEP account, a Simplified Employee Pension, which he uses for retirement savings as owner and sole proprietor of an environmental consulting company.
He declined to say how much money is being managed in the account.
“It wasn’t a matter of whether I could get better returns with Betterment,” he said. “Even if I did the same, I would be fine. But the fact that I would have significantly less fees was the deciding factor.”
In the first week or two after he made the shift, Mr. Hansen said he watched his robo account like a hawk. But after about a month or so, he started to relax and sleep easier while the robot did what it was programmed to do.
It’s been a strong year for the stock market, in general, so all sorts of investors -— using different techniques and services -— have been getting solid results. The S&P 500 and the Dow Jones Index have soared to record highs. The robo-advising trend has yet to run up against a serious market downturn.
Mr. Hansen said he enjoys the thrill of watching his account value go up and down in real time thanks to his online access. He said the robo account is still posting positive returns and he has no plans of going back to traditional advisers.
“There’s two extremes,” he said. “One is having a financial adviser do everything for you and you pay those fees. The other extreme is just doing it yourself. I really just don’t feel comfortable doing all that.” This way, he said, seemed to be a happy medium.