Robo-Advisers: Opportunity or Threat? (Online Forum)

Many believe that investment management is a discipline that requires a large amount of personal attention and professional advice. However, an increasing number of investors — especially millennials — have started looking to technology to help manage their money. The rise of a new breed of wealth manager — commonly referred to as a “robo-adviser” — is changing the landscape of the advisory business and prompting many investors to question the way they obtain investment advice and what they are willing to pay for such services.

This is an important game changer and it raises an important question: Does the rise of low-cost, algorithmic investment services point to a natural change in the industry that makes way for high-volume, low-cost providers? Or is it a trend that will pit these firms against traditional high-end providers of advisory services?

In a 2013 interview, Andy Rachleff, CEO of Wealthfront, was asked to sum up the big idea of his business in 10 words or fewer. He replied: “Everyone deserves access to sophisticated investment management.” So what constitutes sophisticated investment management? Cullen Roche of Orcam Financial Group says robo-advisers “don’t do much (if anything) that an automated buy and hold portfolio doesn’t already do (a well-informed Vanguard client, for instance, gets just about everything these firms offer without the extra fees).”

It is still unclear if these platforms compete on price against more customized strategies and investment products, since as of now they have limited their products to index funds and exchange-traded funds. Does the robo-advisor platform have to evolve throughout the client lifecycle as portfolios increase in size and there is a wish to invest in other asset classes and products in order to maintain clients over the long run?

Others that question a fundamental change in the advisory business and competition with traditional advice point to the value that flesh and blood advisors can provide that an algorithm may not. Some criticize how client information is collected by these automated platforms and believe that people have an advantage in determining a client’s financial goals, investment constraints, and risk tolerances.

Ben Carlson, who blogs at A Wealth of Common Sense, makes the point that low-cost investing is a potential boon for investors but cautions that their behavior plays a large role in their ultimate investment success. He argues that “lower costs do not prevent overconfidence, short-term emotional gut reactions, over excitement, a herd mentality, loss aversion, or any of the other behavioral biases which can hurt investor performance in the long run.” How will these platforms fulfill their clients’ needs during the next downturn, when they require some hand-holding to stay rational and committed to their investment plan?

Investors are faced with myriad opportunities for investment advice, each with differing services and costs. Firms like Betterment, Wealthfront, and FutureAdvisor have been so successful at raising capital from venture capitalists that many other advisory firms, including Vanguard, have begun providing some type of automated services in order to profitably service smaller or less sophisticated investors at lower cost than their traditional offerings. Discount brokerage behemoth Charles Schwab announced it would enter the market early next year and offer advisory services for free, which begs the question: What is the correct way to price advisory services and how can they be structured to be more understandable, transparent, and comparable? Can these platforms compete against those that are willing to provide comparable services for free?

To answer some of these questions and provide insight about current changes in the investment advisory industry, the Future of Finance initiative at CFA Institute has assembled a panel of experts to discuss the implications and potential effects of robo-advisers on the marketplace.

Our distinguished panelists include Randy Cass; Leigh Drogen; Daniel Egan; Gregg Fisher, CFA; and Tadas Viskanta.

Cass is the host of Market Sense on BNN, a Canadian business news network, as well as the founder of two asset management companies: Orchard Asset Management and Nest Wealth. He is a board member of the Toronto CFA Society.

Drogen is CEO and founder of Estimize, a crowdsourced earnings estimates platform. He is a frequent commenter on the role of technology in evolving global finance.

Daniel Egan is the director of behavioral finance and investing at Betterment, an online financial adviser and investment manager.

Fisher is founder and CIO of Gerstein Fisher, a registered investment adviser (RIA) in New York City that employs a quantitative, technology-intensive investment process.

Viskanta is founder and editor of the investment blog Abnormal Returns, and author of Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere.

The discussion will run 18 November 2014. If you’d like to share your perspective or pose a question for our panelists, scroll to the bottom of this post and leave us a comment. Or send a tweet to: @RobertStammers or @laurenfosternyc. We’ll do our best to incorporate your thoughts into the discussion.

Keep your browser open to this post on 18 November 2014 as the discussion will unfold live in the window above.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.