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Will the future of wealth management really be “virtual”?

I’ve been chatting with a few friends over the past couple of days about which model will prevail for wealth management in years to come.

2 sides to the argument

Essentially, there are 2 sides to the argument:

  1. virtualists: The virutalists are banking on a future where investment advisors will prospect, deliver advice, and service clients over virtual channels (Internet, phone, chat, video conference). This is a boundary-less marketing environment and doesn’t put a premium on marketing to a local clientele.  That’s a world where there’s no tennis, no kids’ bar mitzvas, and certainly, no shoulder-crying on your advisor when markets go bad.
  2. ol’ skoolers: This camp doesn’t envision a world where the delivery of financial services changes very much from what it’s been traditionally. Advisors have adopted email and websites and yes, are beginning to use social networks but ultimately, it’s a face-to-face business. You may buy diapers online but you’ll never really buy financial services online.

It might be easy to dismiss the ol’ skoolers as just that — financial dinosaurs who just can’t face the digital future of the business. We’ve got plenty of analysis like this from kasina pointing to the future and it appears to be digital:

the physical relationship with an investment professional is less important when you grow up in the digital age. Imagine video conferencing and e-communication as the norm in the advisor/investor relationship (2025: Wealth Management in the Internet Age)

The facts don’t match

Yeah, but the thing is, this isn’t really happening on the ground. Sure, we read about this financial startup raising millions of millions of dollars of growth capital (think, Personal Capital and Motif Investing )  to capture the multi-trillion dollar opportunity that’s to be had transitioning investors away from their brokers and mutual funds into an online advisory world.

But the data don’t support it. None of these services have any real assets under them yet.  Millions of dollars spent, engineers hired, marketing budgets approved — but the truth of the matter is that if you combine all the assets under management of all these services, they still don’t even come close to approaching the book of a mid-size stockbroker who’s been in the business for 10 years, doing all the marketing himself.

Of course, it’s early for many of these firms and to put in into perspective, they have to outmarket and outspend (frankly) the incumbent asset managers who have spent billions building credibility and brand. Many of these firms, like Betterment and Covestor, have spent wisely to boost their service offerings over the phone, email. So that there’s a real live caring person on the other end of the communications chasm.

But, beyond outmarketing the incumbents, these new startups have to essentially find the market and develop it.

Growing, slowly and surely

These firms are growing but is it enough? Betterment — for example — has over 10,000 open accounts, yet manages a very humble amount of assets (for more on Betterment, listen to my interview with founder, Jon Stein).

At this rate, there will need to be massive money spent on all these new startups to capture the market. Are the VCs along for this expensive ride? Will the payoff really be that great after 5 years?

How scalable are information businesses

The MarketRiders and FutureAdvisors of this space don’t care the size of your accounts. They provide advice in return for a fixed fee. And these types of firms are growing and can build nice, profitable businesses. But how scalable are they — how big can they get?

These firms hit a subsection of the market — the DIY crowd — but there will always be people will need customized, personalized advice and either don’t have the time or don’t want to spend it managing their money.

A 3rd camp: the virtual local asset manager

Maybe the future isn’t solely a world in which we have 2 poles: virtual and full-service.

Maybe the future of asset management is a hybrid — where services can be delivered online but where the local presence of a firm still matters.

There’s still a real person who can take you to lunch…Who will suck it up long enough to play tennis with you…Who will attend your kids’ bar mitzvas.

In fact, Wealthfront has taken that approach. It’s pivoted (well, multiple times) to an online investment advisor targeting a specific geography and persona (newly-minted rich techies in Silicon Valley).

MyGDP, Scott Bell’s (of I heart Wall Street fame) new firm, looks poised to take this same local/virtual approach. Keep an eye on what he’s rolling out.

Will the virualists win or are the ol’ skoolers going to triumph with a big fat “I told you so”?

What do you think? Where’s the winning model?

  • http://www.aaronklein.com/ Aaron Klein

    I think the new models are going to be just as fragmented as the old ones. Clients have diverse needs that can’t be satisfied by a single model. Ultimately, there is room for a variety of winners across this space.

  • http://www.tradestreaming.com Tradestreaming

    Great point, Aaron, and one that I think gets lost in this discussion:
    These firms don’t have to be everything to everyone. They can get a nice chunk of the market and be extremely profitable without entirely OWNING it.

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  • http://twitter.com/JohannaScott Johanna Scott

    Hi Zack – Johanna from Betterment here. In answer to your question — which is the winning model? — of course I’m going to say the virtual! But luckily I also have data to back it up. Since launch, Betterment has been growing at a rate of 20-30% per month. When you interviewed our CEO Jon Stein, back in Feb, we have $20millAUM. We’ve doubled since then and will reach $40millAUM this month.
    Like all disruptive models, it takes some time to gain groundswell, but once it becomes main stream we wonder why we ever did it the old way (I couldn’t imagine banking my paycheck at a bank teller!). 
    Not only is the virtual way more convenient, it’s actually better. A recent study by the National Bureau of Economic Research found that many advisors reinforce harmful behavior because it’s in their best interest to do so. Motivated by larger commissions, the advisor/brokers encouraged bad investing behavior like frequent trades and higher-fee funds. Betterment does not charge on trades and transfers, and we automatically diversify every penny. We make money when our customers do.
    I’m interested to hear what others think!

  • http://www.tradestreaming.com Tradestreaming

    All great points, @twitter-19636750:disqus  and it’s great to hear @betterment is growing like a weed.  So, virtual is more convenient and “better” (I agree) but the point still remains: is it an issue of education (do investors just not know about these platforms) or is the market not there (maybe not ready, long runway, etc.)?

  • http://twitter.com/JohannaScott Johanna Scott

    You make a good point. I think many people are ready (some will be late adopters) but scaling is a case of all of the above: education, awareness, word of mouth. It’s happening, but should happen more.

  • http://www.nutmeg.co.uk/ Julie from Nutmeg

    Good article, Zack. Thanks for bringing this debate to light. I’m Julie, the Social Media Executive at Nutmeg, a UK-based online investment manager. Like Johanna, I’m obviously in the “virtual” camp, although I understand your point that both sides offer benefits for different types of investors. What’s great about the virtual model is that it appeals to people that are Internet savvy and appreciate an interface that is transparent and straightforward. I think that education and awareness will go a long way in increasing the market share of the virtual camp.

  • http://www.tradestreaming.com Tradestreaming

    thanks for the comment, Julie. It’s people like you and firms like Nutmeg that are helping do the heavy lifting in the awareness/education piece that will enable all this to happen.

  • Anonymous

    I think Johanna is right on a lot of points, but betterment’s model isn’t going to be for everyone as @aaronklein:disqus says — what I do find lacking in betterment’s approach, is there really isn’t anyone to make sure the behavior most individual investors aren’t actually making the wrong decision at the wrong time ratcheting up or down their risk at the worst possible times. 

    As it is, a couple of mouse clicks & warnings isn’t much of a barrier to making big mistakes. I almost wish they’d offer an advisor to talk to. I think that’s where Future Advisor does make sense, although I think they’ll have issues with scaling that service model.

    Where Johanna is missing the mark, in opinion with these comments, is to wholly cast a net against the advisor role based on the “many” — I think advisors can and do add value, of course I’m biased.

    To me, for someone who has a smaller account — they’d better off to invest in education rather than hire someone to do it for them — that way they internalize good habits for the long haul. But again I’m biased.

    It would certainly be fun to have a roundtable discussion about all of this, If you want to host it, I’m in.

  • http://www.tradestreaming.com Tradestreaming

    Well, Scott. Being a (former) advisor, you know where I come out on this whole discussion. Both sides — virtual and in-person – run the risk of painting the whole industry in broad strokes. 

    Automated solutions work for a segment of the population while advisors, well, there are some good ones who add value every step of the way.

    I’m up to doing a roundtable — let’s do it.

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  • Stefan

    This is Stefan from yavalu, Germany. We are an online advisor platform
    (similar to WealthFront). I’m sure we are all
    convinced that the online way is the way to go. However, we’ve found out that
    the offline world has some important advantages to offer. All this money jazz
    is still a very personal and delicate thing for most people. A personal
    face-to-face conversation has some undeniable value in the process of
    investment. What we also have found out is that the expectations of the
    face-to-face investment consulting have changed dramatically over the years.
    Customers are much more savvy, want to keep control over their own investments
    and want to know exactly how much this conversation with the advisor will cost
    them (directly or indirectly). But they still value the expert as a sparring
    partner and expert. Therefore we are currently testing a hybrid way of
    combining technology with a human touch.


  • http://www.facebook.com/alexey.sokolin Alexey Sokolin

    Just came across this article! Great thoughts from everyone, and Zack, I am very impressed with the financial startup thought leadership you’ve built at tradestreaming. It’s surprising just how much uncertainty there is in this space, and hypotheses about what will work are constantly in flux.

    What I think we’ll see more is online RIAs building out traditional features (Personal Capital being the clearest example) and traditional RIAs building out online features. For example, did you see that LPL just bought Veritat Advisors, an online financial planning firm, to enable its 10,000 independents to serve the mass affluent in a scalable way? PNC Wealth Management hired IDEO to do a client-centric reporting suite. So there’s some type of convergence between completely hands off and completely hands on.

    I think Blueleaf is sort of on the point by trying to scale out the advisor offering using some of the investment PFM and account aggregation tools they’ve built. We are doing a comparable strategy by private labeling online RIA systems for financial institutions at NestEgg (www.nesteggwealth.com, http://www.nesteggfintech.com). The key question in my mind is how much of the advisory layer, rather than analytics or information, can be automated and put online as self service.

  • http://www.tradestreaming.com Tradestreaming

    Hi Alexey,
    Thanks for contributing to the discussion.Your examples of LPL investing in the online channel is probably a good harbinger of things to come.

    I tend to agree with your last point: while analytics, aggregation, and communication are easy to envision in the online channel, the advisory layer is the lone wolf out there. Will people get comfortable “consuming” investment advice online?

    Only time and lots of VC investment will tell.

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Tradestreaming is a community of investors learning directly from experts. I’m Zack Miller, investor, entrepreneur, and founder of Tradestreaming.com and I literally wrote the book on how to invest in the age of Facebook and Twitter. Tradestreaming is the resource I’ve created to help me become a better investor.  I believe it will help you … Continue Reading