Some of the most successful fintech-startup disruptors have been the so-called robo advisors: providers of apps that give consumers automated investment help.

The leaders in this market, including Wealthfront, Betterment and FutureAdvisor, have attracted large amounts of venture capital and a great deal of media buzz, and they are on a path to capturing sizable market share (more on that later).

So it made perfect sense when BBVA Compass Bancshares in Houston announced a partnership with FutureAdvisor earlier this month. As banks seek to compete with — and borrow some of the best ideas of — fintech startups, more are bound to partner with robo firms or create their own automated investment-advice software.

The $89 billion-asset BBVA Compass has been buying fintech startups such as the digital bank Simple and the digital design firm Spring Studio in its effort to become a leading technology innovator. In April it also became the first U.S. regional bank to partner with Dwolla and offer real-time payments.

"Technology is changing the way people invest, say for retirement — we see it from highly engaged, self-directed investors, all the way to passive investors with limited investment acumen," said Jorge Moller, director of the retail digital segment at BBVA Compass.

BBVA Compass wanted to offer an app that would provide quick access to investment-account information to help customers make better decisions, let them easily manage their accounts — such as old, abandoned 401(k)s — and save time and effort for the customers and the bank. It was aiming mainly for a specific set of customers: tech-savvy, passive investors.

"Passive investors often have what I call 'orphaned' retirement accounts – they worked at a company and then they left that company, their 401(k) just stays there, [and] then they start another one," Moller said. "And they don't touch it."


Why did BBVA Compass choose FutureAdvisor rather than, say, Betterment, Wealthfront or one of the many other robo advisors?

"One key piece is we thought they were doing a good job at communicating with customers," Moller said. The app sends text or email notifications, for instance, every time there's a change on an account.

"The individual emails and mobile push notifications the clients get are all personalized by the algorithms and applied to particular situations," said Bo Lu, FutureAdvisor's chief executive.

Lu's company, which was acquired by the asset management firm BlackRock in September and manages $700 million in client assets, has built about 80% of what a good financial advisor will tell his clients over the course of a year into its software, he said. For instance, the software has a general framework for communicating about orphaned 401(k)s, yet the algorithm provides a different, detailed set of recommended steps for each client.

FutureAdvisor's algorithms apply modern portfolio theory to customers' account data. Account aggregation is handled through Yodlee (which is now owned by Envestnet). Lu said the company does no screen scraping, a type of account aggregation that has been under attack recently.

BBVA Compass plans to build the FutureAdvisor software into all its digital channels and to begin rolling it out sometime this year. For customers who want more advice, a premium version of FutureAdvisor that comes with human investment guidance will be offered for 50 basis points.


I downloaded the FutureAdvisor app on Monday to try it. Account setup was quick, and I was able to link one of my investment accounts , an orphaned 401(k), within about five minutes. The app also asked me a few basic questions: my age (rapidly advancing), my intended retirement age (the 12th of never? sometime before death?), my investment style (low risk/conservative).

The app immediately generated a report card of sorts. It told me I was following six out of nine best practices. This made me feel good, because I haven't touched this account in a long time and never put any real thought into it.

My investing errors, identified by the app with X's in red circles: my portfolio is not well diversified (no surprise there), I have idle cash that should be invested, and I should be saving on taxes by using an employer-sponsored plan (this one isn't true, I do use my employer's plan, but I haven't told FutureAdvisor that yet).

The app generated a specific list of recommended trades. Most of these involve selling stocks and buying exchange-traded funds. A line at the bottom of each page says, "Let us do the work to help get you to your best path." This links to FutureAdvisor Premium, the human-assisted advisory service.

Am I going to drop everything and follow FutureAdvisor's recommendations? Probably not. I think ETFs are generally a good idea, but I would want to research these specific funds before putting so much money into them. And due to sheer laziness and lack of time, I may not get around to that for a while. Maybe I'm even more passive than the demographic BBVA Compass is trying to reach.

One App Store reviewer of the FutureAdvisor app said, "This app is a sales tool that attempts to make the end-user uneasy so that they will upgrade to the 'premium' service. Premium service fees are high."

Lu responds that the company provides all its investment advice right in the app, and customers can conduct all the transactions themselves – and some do.

However, he said, "it turns out [other] people don't really like maintaining portfolios. Especially our tech-savvy passive investors don't wake up thinking, ooh, I'm excited, I might do a rebalance today."

In vetting FutureAdvisor, BBVA Compass went through all its normal compliance and legal reviews, Moller said. One factor that gave the bank confidence was FutureAdvisor's ownership by BlackRock.

"They're not going to go away," Moller noted. "That's a concern with new startups, they could go away at any time, but now they are part of BlackRock that concern goes away."


In the bigger picture, robos so far aren't taking too much business away from traditional investment firms. At the end of the second quarter of 2015, the research firm Cerulli Associates found that consumers had invested $18.6 billion in digital advisers, while total U.S. retirement assets were $24 trillion. Still, $18.6 billion is nothing to sneeze at.

Research suggests this share will grow. According to the firm Corporate Insight, managed account assets among 11 leading digital advice providers grew from $2.6 billion to $8 billion, an increase of 208%, in 15 months.

"Even more telling, these firms achieved their highest six-month growth rate in the most recent period measured – increasing assets by 57% from December 2014 to July 2015 – despite the fact that the first half of 2015 was largely flat for most major domestic indices," spokesperson Joshua Grandy said. "This suggests that most of the growth has been driven by new client assets, rather than market performance."

Cerulli Associates projects that by 2020, $489 billion in assets will be "digitally advised" in this country. This includes mutual fund advisory programs, ETFs, and unified managed accounts. Some of these apps will have some degree of human advice layered in, according to Tom O'Shea, associate director at Cerulli Associates.

"The word 'robo advice' is not helpful, because it suggests you're not going to interact with a human being at all," he said. "The truth is, nearly all of these robo advisors have phone numbers you can call, chat available online, and in one case you're required to call a human being before you invest through the app. If you invest in Vanguard, Charles Schwab or Tradeking's products you can always call their 800 number."

He calls this "the myth of robo advice."

That said, there's a large, underserved market of consumers who today do not receive investment advice, O'Shea noted.

"Most human advisors won't talk to a client unless they have $100,000 or more to invest," O'Shea said. "Wirehouse broker/dealers have set that number at $250,000 or more."

Yet there are 76 million consumer households in this country with less than $50,000 in investable assets; that is out of 122 million households in total.

"Most people in the U.S. live in a financial world where an advisor doesn't want to deal with them," he said. "So the ability to get a scalable solution from a firm to address the needs of this huge slice of the American financial landscape is a huge opportunity."


The first wave of robos (Betterment, Wealthfront, et al.) were fintech startups — pure-play venture-capital-backed firms. More established, direct-to-consumer firms like Vanguard and Schwab have made up the next wave of entrants to the market. Their portfolios are rebalanced centrally, according to some algorithmic strategy. These larger companies have already eclipsed the startups in terms of funds invested robo-style.

"They have huge pools of clients in that under-$50,000 universe," O'Shea pointed out. "That can easily be addressed in a scalable way by creating a digitally advised product."

He says he also believes there's a coming convergence between these digital advisors and traditional advisors.

"We're already seeing it now," he said. "Some of the original robo-advisers have repositioned and retooled their companies to be technology providers for human advisers. So they're not selling their product directly to consumers any more. They're supporting financial advisers that want to have a digital offering."

In some cases, the software will alert the adviser when clients' assets reach certain thresholds or when clients are clicking on certain Web pages often.

For their part, financial advisers are segmenting their practices into digitally oriented and services-oriented arms. As customers' financial lives get more complicated, they will take on more advice from humans. So the robo tools are almost like training wheels for customers.

Banks could create robo advisor tools on their own if they want, O'Shea said. "Schwab created their product in six months," he said. "One of the direct-to-consumer firms we spoke to said their developers were sitting around in between projects and they created the robo."

Where the robo advisors still have an edge, however, is automated client-relationship management — how to address clients when the market is volatile, being able to predict what a particular client's concerns might be, and proactively reaching out through email and blog posts.

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