Is the financial advice industry looking at TurboTax ... or Expedia?

That’s the question many in the sector are asking about the future of online financial advice companies after the demise of Bloomberg LP's planned direct-to-consumer RIA offering, BloombergBlack.

Some observers think online advice startups like LearnVest, Personal Capital, Wealthfront and Betterment will be to the financial advisory industry what Turbo Tax has been to accounting: a lower-cost, mass-market tax preparation solution that broadened the market but didn't put CPAs out of business, and emphasized the need for their expertise for more complex tax problems.

“Today the vast majority of returns are prepared with TurboTax or a similar online solution,” says Philip Palaveev, the industry expert and chief executive of The Ensemble Practice. “That does not mean that CPAs are out of business as tax professionals. They just focus on the more sophisticated and complex cases. I believe the same will happen to advice – the basic cases will go to the online solutions and the complicated cases will go to advisors.”

Others, however, think a better analogy is what Expedia and Orbitz did to the travel agent business -- completely disrupting an existing business model and rendering it nearly obsolete.

Enabling clients to get customized portfolio advice through software that is “accessible and simple enough for the consumer to use directly, eliminating the need for a human being,” will fundamentally transform the advice industry, Andrew Rachleff, co-founder of Wealthfront, told The Wall Street Journal last year.


Questions about the future of online advice have intensified since Bloomberg, the multibillion-dollar data, information and media giant, said last week that it was shutting down its own online wealth management offering -- which was to have targeted individuals who wanted to track and manage their aggregated investment portfolios in one place, offering access to investment tools, information and advice for $100 a month or more.

Why exactly Bloomberg decided to shut down the unit before its official launch remains unclear.

“We weighed the future prospects of the business against the ongoing resource investment and concluded that it wasn’t in our best interest to continue moving forward,” the company said in a statement. “We remain optimistic about the idea and open to the possibility of pursuing a similar business in the future.”

A Bloomberg spokesperson declined to elaborate or discuss the online advice market.


Some industry observers argue that the shutdown does not bode well for other online firms that targeting the mass affluent market -- loosely defined as investors with between $100,000 and $1 million in investable assets.

“Bloomberg has an established brand in the corporate world,” says Chip Roame, managing partner, Tiburon Strategic Advisors.  “Their takeover of BusinessWeek also provided them some brand recognition in the consumer world. These other online firms lack that established brand. I expect their response to be, ‘Oh wow, Bloomberg did not make it -- can we?’”

Industry consultant Tim Welsh, president of Larkspur, Calif.-based Nexus Strategy agrees.

“Bloomberg’s decision proves that online advice is much harder than it looks,” Welsh says. “If a big brand like Bloomberg can’t hack it on a major scale, then that tells you something. Going direct to consumers is very expensive compared with going through the financial advisor channel. Marketing expenses ... will make any online channel unprofitable, as it is impossible to premium price online.”


But others argue that, on the contrary, Bloomberg realized it couldn’t compete with the tech-savvy crop of Silicon Valley-fueled firms, leaving the field open to them.

“BloombergBlack tells us that companies like LearnVest and Wealthfront are on the right track,” says Cliff Goldstein, personal financial associate for NerdWallet, a San Francisco-based consumer advice site that tracks online financial services. “There are a lot of very smart companies with high-quality offerings that are attracting a lot of investment capital.”

Indeed, Goldstein, who manages a platform that generates leads for financial advisors, estimates that online firms have received more than $150 million in private equity investments in the past year. Just last week, LearnVest closed a $16.5 million round of financing, while Personal Capital received $25 million in  new funding last month, and Betterment took in $13 million in financing earlier in the year.

Not surprisingly, the new online firms, which provide account-aggregation services for free and charge low fees for  advice, also maintain that their business models are being validated.

"Wealthfront has grown by over 200% in 2013 alone, to over $300M in assets under management,” says chief operating officer Adam Nash in an email. “The question is not whether the demand is there, but whether incumbent providers can navigate the conflicts inherent in offering high-value investment management at a low price."

Still, attaining profitability remains a challenge for the online rivals, Goldstein cautions: “They’re going to have to demonstrate the value of their service and be able to convert their tech users into financial planning clients.”


The biggest threat to the online advice firms, say industry observers, is unlikely to come from traditional wealth managers -- who target clients with more than $1 million in investable assets who want personalized advice -- but from established financial service giants (such as Charles Schwab, Fidelity and TD Ameritrade) that already have a retail online presence.

“I believe that the advice battle in the direct channel will be predominantly won by the established direct players such as Schwab, Fidelity and TD Ameritrade,” says Roame.

Roame also cited online competition from existing financial advisor firms -- “especially those with Middle America brands.” And indeed, Edelman Financial Services, Savant Capital Management and LPL, through its NestWise unit, have all begun offering low-cost online offerings aimed at the mass affluent market.

“For the RIAs of the world who are rolling out online extensions, I think those can work well,” Welsh says. “They can serve as grooming for their small or accommodation accounts, and then up sell them down the road when they have substantial assets and need financial planning.”

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