The Troubled Housing Behind a Muni Bond

by Vanguard before the plan is set in motion. (About 40 percent of customers connect by video chat at some point.) The conversation gives the adviser a chance to ask about other savings or assets people have and to gauge their investment preferences, says Karin Risi, managing director and head of the retail investor division at the company.

Many of the Vanguard advisers have a credential as a financial planner or are working toward one. Customers need at least $50,000 invested at Vanguard to participate, but only those with at least $500,000 to invest get a dedicated adviser. Clients with less money could end up speaking to one of several members of a team when they call in.

The market for digitally based advice is expected to grow to $285 billion by 2017, according to researcher Aite Group. Millions of baby boomers are nearing retirement and need help figuring out how to make the money last. At the same time, widespread acceptance of index funds has helped make automated portfolios possible. Investors don’t necessarily look to advisers to help them pick individual stocks and bonds.

“We aspire to serve hundreds of thousands of clients over time,” Risi says. In addition to the $12 billion from new advisory clients since May, Vanguard has brought in $9 billion from customers who were part of an earlier pilot program. The company did not reveal the number of accounts.

At Schwab, three-quarters of those who’ve joined its automated service were existing customers. The company oversees $2.5 trillion in total client assets, and by December it had attracted $5.3 billion to Intelligent Portfolios, with 63,000 accounts. Clients can reach out to the company by phone or online, but it’s not required, like it is at Vanguard.

“The startups are facing an uphill battle,” says Scott Smith, a director at Cerulli Associates in Boston. “They are going up against firms with trillions of dollars of assets.”

Executives at both Betterment and Wealthfront say there’s room for established companies and pioneers. Adam Nash, chief executive officer of $3 billion Wealthfront, which launched in 2011, says his company focuses on younger investors with different ideas about technology and investing while incumbents are battling for boomers’ assets. “Those older investors aren’t looking for the same things,” he says. “We want to be the Amazon, the Netflix in this category.” Nash says 90 percent of Wealthfront customers are younger than 50, and 60 percent are under 35.

About two-thirds of the Vanguard service’s clients are nearing retirement age or retired. Roughly half of those who signed up for Schwab’s robo are over 50, says Tobin McDaniel, president of Schwab Wealth Investment Advisory. Of course, older savers are also where most of the money is.

Burton Malkiel knows both sides of this new industry. The Princeton economist’s book A Random Walk Down Wall Street championed the idea of index investing, and he spent decades on the Vanguard board. He’s also chief investment officer for Wealthfront. Malkiel says the robo-adviser trend is about the “Vanguardization of investment advice.”

As happened with index funds, cut-rate competition will push fees down for all kinds of advice, and more people will be able to get help building portfolios. “The presence of Vanguard and Schwab—consumer-friendly companies—is a good thing, not a bad thing,” Malkiel says. and Charles Stein

The bottom line Startup robo advisers have pointed the way to cheaper investment advice. But an established player is taking over the game.

Public Finance After federal subsidies are cut off, investors see a big loss At the Warren and Tulane apartments in Memphis, inspections have found roach infestations, broken windows, buckling ceilings, and missing or damaged appliances. “It’s appalling,” says Jessica Johnson-Peterson, who’s lived at the Warren apartments with her husband and children since 2009. “We have to jump through extreme hoops to even get anyone’s attention.”

Such conditions led the U.S. Department of Housing and Urban Development in February to cut off rent subsidies for more than 1,000 residents. Those federal dollars were to be used to repay $12 million of bonds sold by the apartments’ owner, Global Ministries Foundation. Without that money, the bonds went into technical default, pushing their price to as little as 21¢ per dollar of their face value.

The GMF debts were municipal bonds, government-sponsored debt that offers investors income free from taxes. Munis may call to mind investments in toll bridges and sewers, but they also include bonds like GMF’s issued through “conduits”—local agencies with few, if any, employees that exist only to sell tax-exempt debt for a fee. With little responsibility for the projects they finance—sometimes in different states—the authorities have raised money for privately run nursing homes, charter schools, and even amusement parks.

“Conduits have been a perennial problem in the market,” says Christopher Taylor, the former executive director of the Municipal Securities Rulemaking Board, the industry’s regulator. About 60 percent of muni bonds that default are issued by such conduits, according to Matt Fabian, a partner at Municipal Market Analytics.

The market for conduit bonds is one of Wall Street’s most opaque niches. Seven days after GMF issued a letter to the bond trustee about the default, some bonds were sold in lots of $25,000 and $50,000 for as much as 10 percent