Get ready for a new wave of low-cost, online-only financial advice companies.
Beginning next month, a number of tech firms that are also RIAs are poised to enter the red-hot online advisory space, offering consumers not only financial guidance but specific buy/sell/hold recommendations for mutual funds and ETFs, based on algorithms and aggregation of clients accounts.
In the short term, this is the most exciting category were tracking in the online advice space, says Grant Easterbrook, an analyst who follows investing-related startups for Corporate Insight, a New York-based research and consulting firm. Firms in this category have had the most impressive numbers for account growth and financial backing, and have landed impressive partnerships with outlets such as Yahoo Finance and CNN.
In total, firms using account aggregation and algorithms have raised approximately $70 million since the beginning of the year, Easterbrook estimates. Companies in the broader online advice space, which offer more general personal finance advice and planning guidance, as well as some actual advisor services -- a group that includes LearnVest, Wealthfront and Betterment -- have raised more than $215 million in venture capital since January, Easterbrook estimates.
Among the new players is Financial Guard, which currently has a business-to-business model providing advice and recommendations to employees on their 401(k) portfolios but will roll out an online service for consumers in September. For $16 a month or $150 annually, Financial Guard aggregates clients accounts and then analyzes mutual funds and ETFs to make specific recommendations and provide guidance on portfolio performance, risks, asset allocation, diversification and tax efficiency.
On its website, the firm also promises to help you avoid unnecessary, hidden fees and commission that will have an adverse impact on the long-term growth of your portfolio.
Financial Guard, based in Columbus, Ohio and Salt Lake City, will not execute trades. But although clients can continue to make trades via an advisor, the services emphasis on revealing fees may encourage consumers to simply move their accounts to a self-directed brokerage account at firms like Charles Schwab or TD Ameritrade.
This kind of online portfolio analysis will disrupt the traditional way individuals receive investment advice, argues Kevin Pohmer, Financial Guard's president. Financial advisors are going to be under increasing pressure to demonstrate their true value-add.
Jemstep, a Silicon Valley-based firm that provides recommendations on retirement goals, has been up and running since January and will add new features this fall, according to Simon Roy, the firms president.
Offering both free and fee services, Jemstep currently tracks around $2 billion in assets and has around 10,000 users with approximately $200,000 in average portfolio assets, Roy says.
PARTNER OR FOE?
Down the road, we can see working with RIAs using a melded model" that incorporates the firm's technology, Roy says.
But advisors shouldnt be too complacent, he cautions. There is no doubt [online-only advice firms] are changing the landscape, he maintains. They will do what Schwab did to the brokerage industry 20 or 30 years ago. Schwab was initially laughed at, but proved to be a phenomenal technological and execution service that was the next phase in the evolution of investment advice.
Two other similar firms are also jumping into the online financial advice space. Quovo plans to launch an analytical service for large, sophisticated investors such as family offices and small foundations in the fall, followed by a consumer offering early next year. NestEgg Wealth is targeting early 2014 for a consumer launch of an online wealth management service focusing on retirement and portfolio optimization.
These new entrants will join a host of other existing players in the online financial advice market. They include SigFig, which boasts partnerships with CNN, USA Today and Yahoo Finance, and 401(k) specialists Future Advisor, which also works with CNN and, like SigFig, makes specific buy/sell recommendations.
Not all the players in this increasingly competitive space will survive, of course. Bloomberg shut down its online, direct-to-consumer RIA offering last month, and LPL just closed its nascent NestWise unit, which was originally intended to target mass market investors with a high-tech offering.
But Corporate Insights Easterbrook predicts that the equivalent of a Mint.com, which has excelled in the online budgeting and financial management category, is bound to emerge. And that, he says, is bad news for advisors.
The new online-only offerings look like what Generation X and Generation Y want, he adds. If you put their web service side by side with what traditional firms have, the new digital companies are more transparent, cheaper and have a better mobile platform.
The new services emphasis on breaking out fees and expenses in client accounts also doesnt bode well for advisors, Easterbrook contends. The reality is that people dont know as much about the financial industry as they should. What theyre going to see in front of them will make for some awkward conversations with advisors.
Former NAPFA chair Tom Orecchio, principal at Modera Wealth Management in Westwood, N.J., doesn't think all advisors are equally threatened. It will only happen at firms that have high fees and only deliver investment management. I suspect that happens more at the wirehouses than at RIA firms.
Traditional advisors do need to make changes to their technology infrastructure to attract younger clients, Orecchio concedes. But people will continue to pay for personalized advice he argues.
You cant put everything in an algorithm, says Orecchio, last year's winner of Financial Planning's Industry Leadership Award. Online services like WebMD and TurboTax helped educate people in their fields and provided assistance for basic needs at home. But people still go to doctors and accountants. So I dont think new online services will wipe out the financial planning industry.
Indeed, Easterbrook points out that the new entrants face plenty of headwinds.
The big unanswered question is: Will people pull the trigger on the buy/sell recommendations? he says. They will see it, but will they take action? Also, most of the new services dont do a good enough job getting all the information they need from users to have their total financial picture. Their questionnaires need to be more holistic, and they have a ways to go.
Easterbrook sees another problem, too: The online only sites cant yet assign multiple goals to their accounts, according to Easterbrook. They can designate retirement as a goal, for example, he explains, "but only retirement.
Nonetheless, investor capital keeps pouring into the space, and partnerships keep piling up.
Financial Guard will launch its consumer service next month with approximately $5 million in in capital raised to date, with private equity backing provided by Salt Lake City-based Cherokee & Walker, Pohmer says.
Quovo recently received more than $1 million in financing from its two lead investors, both family offices, and is finalizing strategic partnerships with professional organizations, service providers and financial institutions, according to founder Lowell Putnam.
Jemstep has raised more than $10 million over the last five years, and Roy says the company is partnering with Windham Capital Management, a $50 billion institutional investment manager, and CashEdge, a payments and aggregation service vendor to large banks and financial institutions.
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