Automation Replaces Financial Advisers in Some Banks, Part III

The pros and cons of automated versus human financial advice. Which to choose? Last part of WSJ article on reducing cost of financial advice.

    

Ann Gugle, a principal at Alpha Financial Advisors in Charlotte, N.C., said her firm recently cut its annual fee on assets of over $5 million to 0.125% from 0.25%. “If you do the math, you realize your practice will be worth significantly more if you’re smart about aligning your pricing with the value you deliver,” said Ms. Gugle. “If not, you’re going to be mincemeat.”

Robert Schmansky, a solo practitioner in Livonia, Mich., dropped his advisory fee to 0.85% from 1% earlier this year.

Until recently, Mr. Schmansky said, he has mainly marketed himself as a fiduciary—someone committed to working in the client’s best interests. Now he finds himself in direct competition with Vanguard, Schwab and others that also call themselves fiduciaries. “My key marketing distinction is being eroded by these firms in some ways.”

He said he works with a lot of younger investors, and “when I tell them my fee is 1%, they know immediately that Betterment costs less.”

Of all the initiatives, Vanguard’s is widely cited as the most threatening to the status quo. The firm’s size, brand recognition and aggressive pricing will create a challenge unlike anything independent advisers have seen before, said Michael Kitces, director of wealth management at Pinnacle Advisory Group Inc. in Columbia, Md.—much as Vanguard’s index funds have wreaked havoc on the traditional mutual-fund business.

Vanguard’s Personal Advisor Services (minimum investment: $50,000), has gained traction because customers want it, said Karin Risi, head of the firm’s retail investor group: “They didn’t just want to invest in a fund with us—they were saying they needed more help.”

So far, only about 10% of assets in the program comes from clients new to the firm. Advisers and industry analysts say it is only a matter of time before the service starts poaching more clients from competitors.

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Vanguard has devoted about 500 financial advisers to its venture, said Ms. Risi. She expects the firm to hire roughly 100 advisers annually for the next several years. Clients with more than $500,000 get a dedicated adviser, who is a certified financial planner; those with less interact with rotating advisers drawn from a pool, some not yet CFPs.

Many traditional advisers suggest that partially automated services such as Vanguard’s provide basic, cookie-cutter advice inferior to what an experienced financial planner can provide. Ms. Risi said the firm’s advisers go through “pretty impressive training.”

Elyse Foster, an adviser in Boulder, Colo., has taken note. Three years ago, she cut financial-planning fees by an average of 40% at her firm, Harbor Financial Group Inc. It also has invested in technology that allows clients to open accounts online, automatically rebalances portfolios to a target mix of stocks and bonds, and shares software so clients can simulate their own planning scenarios.

“We are aware consumers are more price-conscious and are lowering our fees proactively,” said Ms. Foster. “We are trying to stay ahead of the industry.”

This concludes the three-part article on the automation of financial advising.

We refer the reader interested in learning more about the current trend of mistrusting human intuition and deferring instead to mathematical algorithms to the book by Daniel Kahneman, Nobel Prizewinner in Economics: Thinking Fast and Slow.

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