Online RIAs will mostly fail -- and here are 10 reasons why

Firms like Personal Capital, Covestor and Betterment are garnering both media attention and big VC bucks -- but backers severely underestimate the tie between investor and advisor

Wednesday 5.23.12 by Guest Columnist Jack Waymire

Brooke’s Note: Early in my career I spent six years as a business broker based in Cambridge, Mass. Occasionally we’d list a laundromat for sale and run an advertisement for it in the Boston Sunday Globe. On Monday morning, the phone would be flying off the hook.The callers were doctors, lawyers, MBAs and engineers, in addition to recent immigrants who composed our more usual pool of buyers. The reason for such avid interest in owning a laundromat among professionals was that the rooms of washers and dryers were presumed to be self-operating. See: Why I find the term 'robo-advisor’ objectionable and unhelpful. But buyers who purchased these businesses on that basis were sorely disappointed and lost most of their investment. Turns out laundromats require tremendous attention to really hum and for machines not to get beaten up for eating quarters. So I come into this debate on do-it-all advisory websites with that bias about self-operation and some of Jack Waymire’s thoughts here have only fueled my skepticism. I also know it could be a “Dewey wins” headline.

Several well-known venture capital firms have invested substantial sums of money in startups that believe they can revolutionize the way investors obtain financial advice. Their goal: to replace the traditional fee-based advice model with online services that claim do a better job for a lot less money. See: Betterment’s Jon Stein talks human-RIA coopetition but breathes fire about fellow online RIAs.

These firms believe they have the answer for investors who are fed up with the perceived mediocre results and high fees of personal financial advisors. In effect, they want investors to fire their financial advisors and move their assets onto their platforms.

A prominent example of such an online RIA is Personal Capital (which in March launched an iPad app. See: Why RIAs are shunning mobile apps and why Black Diamond, Orion, Fidelity and others are still placing their chips on an iPad future). Other upstart online advisors attracting attention from the media, in a addition to VCs, are Covestor Investment Management), Betterment), Wealthfront and FutureAdvisor.

Financial advice is already highly automated. There are computer programs that develop financial plans, create investment policies, allocate assets, select managers and re-balance portfolios, report performance and process transactions. However, investors currently obtain the programs’ output from financial advisors who know how to use the software to produce advice, solutions and decisions. It was inevitable that some enterprising entrepreneurs would integrate the tools and offer them to investors over the Internet for reduced fees. See: RIAs and online brokers are winning the market-share game.

Ties, but how strong?

Based on the content on their websites, these companies believe investors will sign up in droves if they give them a nominal amount of information, a friendly user experience and some level of assurance for investment performance. See: A departing NestWise advisor tells what he learned from the whole experience.

But I believe these companies and their financial backers have badly underestimated the strength of the relationships that exist between investors and advisors. For this reason, I believe these websites will fail or, at best, be marginally successful. Here’s why.

1. Notwithstanding mediocre performance and higher expenses, advisors dominate their relationships with investors. Investors wouldn’t know what to do without their advice and services.

2. A high percentage of investors believe stockbrokers are investment advisors because that is what they were sold. However, that belief exists and strong relationships have developed over a period of years.

3. Young investors, who don’t have advisors, may embrace this form of “black box” investing. However, older investors, who have been burned in the past, will be more skeptical. In fact, most experienced investors have been educated to avoid investment strategies that are based on undisclosed algorithms.

4. Young investors may be a bit naïve, but even they will question how these online firms deliver “simple yet sophisticated” investment services with few or no investment professionals. Mathematicians are not chief investment officers, analysts or portfolio managers. One site even referred to its professional staff as Silicon Valley engineers. See: Bloomberg warns that BloombergBlack is shutting down.

5. Investors with larger asset amounts are more cautious and skeptical. they will question how the online firms have developed magic investment formulas when hundreds of Wall Street Ph.D.s using Cray supercomputers could not. See: How analytical advisors can finally supersede salesy advisors.

6. Here is a major disconnect: Investment firms which profess to have magic formulas that produce exceptional returns do not manage $20,000 accounts for $50 per year. They would market their services to investors with much larger asset amounts or keep their formulas in vaults and enrich themselves.

7. Investment products are sold, not bought. Someone has to convince investors to buy what the financial services firms are selling. This process is easier when the seller is face-to-face with the buyer.

8. Most investors rely on personal interaction to determine whom they can trust with their money. It is not ideal, but most investors use subjectivity when they select advisors: personalities, brand names, location, appearance and sales presentations.

9. Money is a very emotional topic. Consequently, investors have personal relationships with their advisors. They respect professionals who listen to their goals and concerns and adapt their advice to their individual requirements. This need is not satisfied with cookie-cutter services. See: In what may be a first, an RIA brings on a psychologist as a financial planner.

10. If these sites want to make me a believer they should disclose their growth in clients and assets. Until they provide this disclosure, I will continue to believe this latest and greatest investment “concept” should come with a warning label.

The old-fashioned way

Online companies will need a lot more venture capital money to build brand names that produce major financial benefits. And, those benefits will have to be tangible and irrefutable. Sales claims will not get the job done when you are up against the establishment.

Meanwhile, I will continue to use the services of a financial advisor and I will tell my Internet-savvy children to let someone else test the validity of the online service companies’ assumptions and algorithms.

Jack Waymire spent 28 years in the financial services industry. For 21 years he was the president of an RIA that provided services to more than 50,000 investors. He is the author of Who’s Watching Your Money? — the first book that provided an objective process for selecting higher-quality financial advisors. Waymire is also the founder of , a website that provides free tools and data to investors who use the services of financial advisors. He is a columnist for Worth magazine and a blogger on major financial websites, and is frequently quoted by the media.

Final Note: Whether people win or machines win may depend on how much RIAs change with the times. See: Why Joe Duran believes that classic RIA firms face extinction.

Jack Waymire

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