Wealth Management 2.0

Efforts to bring low-cost, unbiased investment advice to the masses are nothing new. You could date those efforts to the birth of the U.S. mutual fund industry early in the last century. The wealthy could afford private investment counsel, but who, they asked their advisors, would manage money for their maids?

I kid you not. Those requests led the firm of Scudder, Stevens & Clark to start the first no-load mutual fund in 1928. It was a way, one managing director said, of bringing the benefits of professional money management to “the great unwashed”.

Today, we are seeing a new generation of startups attempting to disrupt the wealth management industry by using technology to deliver high-quality, low-cost professional management to younger, mass-affluent investors.

Here’s a partial list of the well-financed companies engaged in this endeavor:

Betterment              https://www.betterment.com/

Future Advisor         https://www.futureadvisor.com/

LearnVest               https://www.learnvest.com/

Personal Capital       https://www.personalcapital.com/

SigFig                    https://www.sigfig.com/

Wealthfront             https://www.wealthfront.com/

Well-funded though they may be, these upstarts face significant marketing challenges. They need to be prepared for long conversion cycles. Extensive free services, such as the financial dashboard offered by Personal Capital, are a smart way to get prospects engaged. With no track records and no independent verification of investment performance, these services are likely to see – at least initially — minimum-sized accounts as investors dip their toes in the waters. They will need to be patient as all but the earliest adopters wait for them to prove themselves before investing significant assets.

That said, these online, automated RIAs bear watching. The wealth management industry’s vulnerabilities are well known. They include high fees, loss of trust, and general weakness in the use of client-facing technology (web, mobile apps, social media). There is no reason to think the way wealth management is delivered today is the way it will be delivered 10 years from now.

What these startups do is disruptive because:

  • they will change client expectations for the digital experience of wealth management and the use of mobile applications,
  • they will put downward pressure on fees*, and, most importantly,
  • they may gain traction among tomorrow’s clients – smart, younger, time-challenged, digitally savvy investors who are building wealth.

In particular, the industry is vulnerable to losing assets as wealth moves from the one generation to the next.

Make no mistake: some high net worth investors will give these new algorithm-enabled RIAs a try. HNW clients have already diversified their advisor relationships. Some who might have had one or two wire house accounts before the financial crisis might need two hands to count their relationships today. On average, HNW clients are much more comfortable with the use of technology than their advisors are.

But the bigger risk is that those who don’t pay attention may miss out on a generational shift in how people want their money managed. And that next generation may prefer the advisors who want its business today, and didn’t make it feel like part of the great unwashed.

*Personal Capital will manage a $100,000 account for 95 basis points, all-inclusive. Fees decline with volume.