6 Robo Advisory Firms Trying Hard to Innovate
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We’re often puzzled as to how people can use terminology to put an entirely new coat of paint on something that’s been around for a long time and then purport that it’s new and exciting. Take robo advisors as an example. In the good old days, you met with a wealth manager who asked you a bunch of questions and then plugged them into a piece of software that said where you should optimally invest your money. Usually, this is just a very simple asset allocation strategy with X% in bonds and Y% in stocks based on your age and appetite for risk.
Then, as a result of the perpetual cost savings initiatives that permeate the corporate world, we decided to remove the human element, externalize the software, and call it a “robo advisor”, a term that somehow implies that there is more under the hood than there actually is. Then a few months ago, we get an email from some PR hack with the following revelation:
Move over Robo Advisor — it is the Hybrid Advisor that is now getting all the attention. A Hybrid Advisor, much like the name suggests, offers a more holistic investment platform where a human is in control, but is also using computers to help with overall investment strategy.
That is ridiculous. So now we’ve gone full circle back to where we just started. CB Insights recently concluded their awesome “Future Of Fintech” conference during which we saw a unicorn misbehaving in Central Park and a recurring theme about how saturated the robo advisor space is now. We recently looked at whether or not the biggest robo advisors are the best, and concluded that in fact, they are. Now that we’ve sorted out which robo advisors are best to use, we’re interested to look at all the gimmicks innovations that have cropped up in the saturated robo advisor space.
The World’s First Free Financial Advisor
We knew this one was coming. Offering free trading doesn’t work out for everyone as we found out when Loyal3 closed shop recently after taking in just over $48 million in funding. Founded in 2013, New York startup WiseBanyan has taken in an undisclosed amount of funding to invest people’s money and not charge them any fees to do so. That’s because they plan to sell premium packages like their “tax-loss harvesting” package which will cost you 0.24%. Betterment offers tax-loss harvesting as part of their 0.25% fee so why not just use Betterment? That’s what most people must be thinking as WiseBanyan’s “assets under management” (AUM) as of March 2017 totaled $94 million from 23,028 accounts (average account size of $4,100). That AUM is about 1% of what Betterment manages.
Pay What is Fair
Based out of Marina Del Ray, California is a startup called Aspiration which has taken in $20.5 million in funding to offer an impact investing product. The feel-good platform encourages people to “only pay what fees you think are fair” and you’re perfectly free to pay zero. It’s not really zero though, because the funds that Aspiration lets you choose from have larger fees than the low-cost Vanguard ETFs we’d like to see used. Their Redwood Fund and Aspiration Fund charge .51% and 1.49% respectively. Based on their latest filing dated March 2017, the firm has $23 million in AUM with 13,000 accounts that average about $1,769 in size. If you have an account of that size, your propensity to be generous with your donations seems low. The firm seems optimistic though with this cheeky example on their website:
Update 05/21/2020: Aspiration has raised $135 million in Series C funding to fuel continued growth. This brings the company’s total funding to $200 million to date.
Most people don’t have a problem being charged fees if they receive value in exchange. At this point, we don’t see any additional value being added by increasing fees ourselves. We could use the platform for free but there’s not enough AUM on the platform and there are better alternatives. Motif’s recently released an Impact Investing product offering which looks like a direct challenge to Aspiration and they will refund 100% of your subscription fees if they don’t outperform the broader market over the first year.
Invest Like a Woman
We’ve never imagined that you needed to teach women a gender-specific way to invest. Our female MBAs seem to be just as bad as the men when it comes to forecasting market predictions. Is it okay to say that you believe women have a unique situation that requires specialized investing advice? We don’t know the answer to that question, but it’s precisely the value on offer from Ellevest, a New York startup that’s taken in $19 million in funding from some big-name investors like Khosla Ventures and Morningstar.
That’s twice the fee that Betterment charges. While they’ve partnered with Morningstar, they aren’t investing in any overpriced active mutual funds but instead choosing low-cost ETFs which is good. If you believe that a gender-specific investment strategy can outperform the broader market and are willing to pay a premium for it, then you can join the 5,219 people that have climbed on board Ellevest as of March 2017. With total AUM of $25.4 million, the average account size at Ellevest is $4,694 which is higher than the two previous robos we just talked about.
Bionic Investment Advisors
What word comes to mind if you mentally visualize a robot combined with a human? If you thought of the word “bionic”, then that’s what a robo advisor called Bento is hoping for. Singapore based Bento has taken in an undisclosed amount of funding and describes themselves as a “human led robo advisor that brings institutional asset allocation model for individual investors“. They charge .30% and suggest that minimums should start at $1,000,000. This whole “bionic” thing seems to have legs as evidenced by a Bloomberg feature about how “Your financial future is a bionic adviser” which highlighted Jemstep, a “bionic robo advisory firm” that was acquired by Invesco last year. Maybe there is something to this whole hybrid advisor bionic advisor thing after all.
401K Transfer for Lazy Busy People
One consumer profile that robo advisors want to appeal to are those people who have lots of money stashed away in an old 401K account that’s sitting there gathering dust and lining some asset manager’s pockets with ridiculous fees. While it will probably take you a whole hour to transfer those assets over to Betterment, that’s an hour that could be spent reading about what connotations there are in Jay-Z’s new album about whether or not he cheated on Bey and what the Beyhive thinks about it. All incredibly important stuff that’s dominating news headlines, so why not just engage the services of Blooom which will charge you $10 a month to manage your 401K for you? Describing themselves as “one of the nation’s fastest-growing robo-advisors”, this Kansas startup has taken in $13.15 million in funding so far and has analyzed $1.6 billion in retirement assets so far representing 27,555 accounts (average account size of $58,000). Sincerely guys/gals, well done on thinking up a very ingenious way to help people pay lower fees.
A Free Robo Advisor Until it Isn’t
Our foreign correspondent in Hong Kong brought this one to our attention. In between bites of dim sum, he noticed that an ad kept popping up on his smartphone about a new robo advisory offering called Chloe which comes from a firm called 8 Securities. Founded in 2012, Hong Kong firm 8 Securities has taken in $29 million to develop “Asia’s first and only private social network, global trading, and automated wealth management platform“. Now they’ve come out with a robo advisor named “Chloe” that is “powered by artificial intelligence (AI) and machine learning technologies developed in-house“.
“This AI stockbroker could be the future of financial advising” says Mashable, and “offering no-fee trading is one way to stand out” the article claims. Actually Mashable, it’s not really “no-fee trading” but people may be missing that part. Taken from an article by the SCMP:
Jenny Lau, a recent graduate whose basic monthly salary is HK$21,000, said she would try her hand at Chloe because it has no penalty and is convenient to operate on her mobile phone. “The minimum investment of under HK$1,000 is no big deal for me,” she added.
Well Jenny, maybe you should read the fine print. It’s only free if you invest less than $8,888 HKD ($1,138.45 USD) else you get charged a pretty steep .88% in fees. Maybe Jenny should check out Ellevest instead. Or maybe she should just avoid all these gimmicks cutting-edge innovators entirely and stick with the big-name robo advisors that add value and make ishtloads of money due to a little thing called economies of scale.
Conclusion
There aren’t any barriers to entry when it comes to putting together a robo advisor. The key measure of whether or not you are having any success is the AUM metric which shows how much money people are willing to entrust you with. We have a hard time seeing how any of these 6 robo advisors offer a truly compelling value proposition. Maybe the exception is Blooom, but why not just take the time to transfer your old 401K account over to Betterment and be done with it? Many 401k providers offer a selection of funds to choose from that are all overpriced, so what’s the point of sticking around exactly? Just remember that people from HR were probably involved with setting up those 401k plans. Do you really want someone from HR involved in helping to manage your retirement?
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