Searching for Financial Advice Online
By Ruthie Ackerman
Even as many financial advisers try to shift upward from the mass-affluent segment to a wealthier clientele, some new Internet-based startups are aiming their services at the not-so-rich.
While online investment platforms aren’t new, such fledgling services asWealthfront and Betterment are trying to distinguish themselves with new programs to provide advice electronically. The investment minimums are as low as $5,000 – or even nothing at all.
Generally speaking, they seek clients who are satisfied with an online, largely automated process and who don’t need for face-to-face contact with an adviser. As the public gets more comfortable carrying out all kinds of activities online and as traditional advisers pursue the wealthy, this new market should grow. Jonathan Stein, founder and CEO of Betterment, sees online advisory platforms as the answer for the “99% of everyone in this country” with less than $500,000 to invest.
Betterment, based in New York, has no investment minimum and charges a 0.9% fee for those with up to $25,000. At the top of its sliding scale, the fee drops to 0.3% for those with $500,000 and above. The company has about 10,000 customers, says Stein, and over $20 million in assets under management.
When a client signs up with Betterment, they fill out a questionnaire about their age, savings goals, income and risk tolerance. Based on their responses, Betterment makes recommendations using two exchange-traded-fund baskets: a basket of stock-focused ETFs carrying higher return expectations but also higher risk, and a lower-risk basket of bond ETFs. The client is then free to adjust their allocation between the two baskets. Accounts are rebalanced quarterly, or sooner if holdings shift more than 5% from the target allocation. That, Stein says, “almost makes up for our fee in and of itself.”
“By automating our whole process, we’re able to serve even $2,000 customers,” he says.
Betterment currently focuses on investment services, but Stein see platforms like his moving into other areas, such as tax advice and estate planning.
Andrew Rachleff, co-founder of Wealthfront, believes online financial platforms could reshape the advisory industry the way travel sites like Expedia and Orbitz transformed the travel industry when they eliminated the need to use travel agents. Clients are able to get a tailored portfolio through software that is “accessible and simple enough for the consumer to use directly, eliminating the need for a human being,” Rachleff says.
“When you get rid of the human being, you get rid of much of the cost without getting rid of any of the rigor,” he says.
Wealthfront, based in Palo Alto, Calif., has a minimum investment of $5,000 and charges no advisory fees on a customer’s first $25,000 under management. It charges 0.25% on assets over $25,000, including the cost of monitoring and periodically rebalancing the portfolio.
Another online advisory platform is Personal Capital, which charges a 0.95% fee to manage the first $250,000 in investable assets and scales down the more money the client has to invest. But the minimum to invest is $100,000.
The company’s founders include Bill Harris, the former chief executive of PayPal and Intuit. It is different than some of the other online platforms in that clients interact online with a financial adviser, who is assigned to them and offers individualized investment portfolio management. These advisers can be reached via email, phone, video and through the chat function on the site.
Launched in September, Personal Capital, based in Redwood City, Calif., has close to 5,000 clients with an average managed account size of about $300,000, a spokesman says.
One challenge for the firms is getting investors, shaken by the 2008 crisis, to be willing to experiment with new approaches to investing. Even in the best of times, “financial services is not a place where people take a lot of chances on a firm that they’ve never heard of,” says Katharine Wolf, a senior analyst at Cerulli, a research firm specializing in the financial-services industry. “The biggest hurdle we see for these platforms is getting people to trust them.”