Get ready for more competition from an onslaught of low-cost, web-based advisory firms. Fueled by what industry sources estimate is more than $200 million in venture capital and private equity funding in 2013 alone, a slew of companies are expected to either come out of a trial period or gain traction after earlier launches. These firms are poised to offer consumers a stark choice between the traditional advisory business model and an online experience.

A key question is how the new model will affect existing RIAs. To assess the impact, one industry expert points to the contrast between TurboTax - an online model that had a relatively benign impact on the accounting profession - and travel booking sites Expedia and Orbitz, which decimated the travel agency business.

"Today the vast majority of returns are prepared with TurboTax or a similar online solution - [but] that does not mean that CPAs are out of business as tax professionals," says Philip Palaveev, chief executive of the Ensemble Practice. "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," he says.

Kevin Pohmer, president of Financial Guard, envisions a more troublesome scenario for traditional advisors. Financial Guard is a new, low-cost online-only firm that, for $16 a month or $150 annually, will use algorithms and account aggregation to assess client holdings, analyze mutual funds and ETFs to make specific recommendations, and provide portfolio guidance.

"This kind of online portfolio analysis will disrupt the traditional way individuals receive investment advice," he argues. "Financial advisors are going to be under increasing pressure to demonstrate their true value-add."



The number of firms elbowing their way into the online advisory space is growing fast. Among the key players:

* LearnVest Planning Services, a financial advice website that pivoted to become an RIA last year, offers broad-based financial advice for a $399 upfront fee, plus $19 a month, and charges even less for assistance with a specific goal, like paying off debt or budgeting.

* Firms like Wealthfront and Betterment, which already have approximately $300 million and $250 million in assets under management, respectively as of late summer, ask clients to answer online questions about financial goals and risk tolerance, then use algorithms to recommend - and actually make investments in - diversified ETF portfolios, charging around 0.15% to 0.35% of assets under management. (Wealthfront doesn't charge on the first $10,000 in assets.)

* Another group of providers - including Personal Capital, headed by former PayPal and Intuit CEO Bill Harris, as well as FutureAdvisor, Jemstep Portfolio Manager and SigFig Wealth Management - all use algorithms and account aggregation to provide specific buy/sell/hold recommendations for funds. These online RIAs also provide general guidance on risk, diversification, asset allocation and tax efficiencies.

* Other account and algorithm-based online RIAs launching this year or early next year include Financial Guard, Quovo and NestEgg Wealth.

"Without any human touch, these new services recommend selling funds that are high-cost, poor performing and/or not in line with the users' investment goals, and suggest better alternatives to buy," notes a study by research and consulting firm Corporate Insight.

Not surprisingly, younger clients are seen as a prime target market for the new online firms.

"Younger clients grew up online and are very comfortable doing business online," says Jason Gordo, CEO and co-founder of FlexScore, a site set to launch this month that scores a consumer's financial life based on individual goals and account performance. These younger consumers "bank, pay bills, move money, shop, play and share online," he says. "It's natural they would go online for financial advice, as well." But just because younger people are more comfortable online doesn't mean they will forsake working with an actual advisor.

"At first blush, it does seem like advisors could be hurt by this technology," says Kim Dellarocca, head of practice management at Pershing, who recently oversaw a study on Gen Y's impact on the industry. "But that kind of generalizing about young people doesn't hold up under closer scrutiny. They're very social creatures. ... They want personal relationships, and they want to call someone for help."

Craig Pfeiffer, CEO of Advisors Ahead, which specializes in developing younger advisors, agrees. "Millennials are not pure do-it-yourselfers," he says. "They want access to real people, and they are used to a validation model when it comes to transactions."



Fees are a perceived vulnerability, particularly for traditional brokers and advisors. Many websites that aggregate clients' accounts dramatically highlight every fee clients are charged - including commissions, expense ratios, load fees and surrender charges - and suggest consumers would be better off taking their business elsewhere.

Financial Guard, for example, promises to "help you avoid unnecessary hidden fees and commissions that will have an adverse impact on the long-term growth of your portfolio." Based in Columbus, Ohio, and Salt Lake City, Financial Guard will not execute trades. But the service's emphasis on revealing all fees may encourage consumers to move to a self-directed brokerage account at a retail firm.

Rudy Adolf, founder and CEO of Focus Financial Partners - the nation's largest consolidator of independent advisory firms with $65 billion in AUM - says he isn't concerned.

"Advisors' fees are clearly stated on their ADV form, which is easily available and accessible to the public," Adolf says. "There isn't much point to shining a flashlight on something if the room is already brightly lit. That's not such a great service." (For more from Adolf, see Interview, page 20.)

Financial Guard's Pohmer disagrees. "Yes, everything is ... disclosed on the ADV, but how many people actually read them?" he asks.

Clients' ability to easily see how much they pay in fees will affect the traditional advisory business, the Corporate Insight report concludes.

"In the past, clients may have simply grumbled to themselves about advisor fees with little recourse for action," the report says. "Now, these clients can use a service like SigFig to see just how much they're paying in fees and how much money they're losing in a high-fee mutual fund compared to a comparable index-based ETF."

As a result, traditional advisors will be held more accountable and will need to demonstrate the added value they can provide, industry observers say.

That is a challenge advisors can and should welcome, says former NAPFA Chairman Tom Orecchio, principal at Modera Wealth Management in Westwood, N.J. People will continue to pay for well-informed, personalized advice, Orecchio argues.

"You can't put everything in an algorithm," he says. "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 don't think new online services will wipe out the financial planning industry," he adds. "Good planners who can provide quality service and guidance for complex issues should thrive."

Planners with wealthier clients who need more complex advice are probably more secure, says Adolf: "In-depth levels of multifaceted and complex advice can't be commoditized."

Unlike traditional advisors, most of the algorithm-based online services don't - or can't - collect enough information to provide a holistic picture of a client's complete financial situation and goals. Consumers can't yet assign, for example, multiple goals to their accounts, such as retirement and saving for college. And online executives say consumers simply won't answer more than a relatively few questions online about their financial affairs.

"We've been watching what [the online advisory companies] have been doing with keen interest, but have concluded it won't be damaging to our business," Adolf says. "Our top advisors are not targeting the same market of do-it-yourselfers and lower-account clients that they are."



To be sure, the new wave of online RIAs face a host of challenges.

"Going direct to consumers is very expensive compared with going through the financial advisor channel," notes industry consultant Tim Welsh, president of Larkspur, Calif.-based Nexus Strategy. "Marketing expenses on a direct basis will make any online channel unprofitable, as it is impossible to premium-price online."

The "freemium" model used by firms like FutureAdvisor and Personal Capital, which tries to upsell users to a paid advisory product, may prove to be an uphill battle, skeptics say.

Another unanswered question for sites that are not actually executing trades: How effective are buy/sell recommendations alone? Consumers "will see the recommendations," says Grant Easterbrook, an analyst for Corporate Insight, "but will they take action?"

Whatever flaws the online advice firms have, executives say it's still early for the sector. Simon Roy, president of Jemstep, compares the launch of online-only advice firms to the arrival of Schwab on the brokerage landscape. "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," he says.

Gordo, who in addition to running FlexScore is the CEO of Valley Wealth, a Modesto, Calif.-based RIA, believes traditional advisors can and will accommodate themselves to the new technology.

"The industry is rapidly changing, whether advisors like it or not," he says. "Online tools are only getting better and cheaper, and people are getting used to using them - and using them for free. ... We think advisors should look to online services and tools to supplement and enhance their practice."

Advisors, he says, "need to remember they know the client better than anyone and can serve their needs - not only at a given time but, based on their experience, are able to anticipate needs a client hasn't even thought of yet. And that's something an algorithm just can't do."



Charles Paikertis a senior editor of Financial Planning.

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