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Robo Advisor vs. Digital Advisor

Robo Advisor vs. Digital Advisor

The robo-advisor: not since John Bogle came up with the idea for Vanguard in 1975 has a new development in the investment industry caused so much controversy and turmoil.

I can appreciate Wealthfront CEO’s position on his new robo competition from Charles Schwab. There are already dozens of media stories that detail the debate. I don’t want to argue about the minutia involved with each robo product offering. After all, every financial services company has a right to offer new products and evolve how they deliver investment services. However, here’s what the entire Robo Industry is missing: advice.

What neither Schwab’s nor Wealthfront’s new robo programs offer is real life advice in the form of a dedicated advisor. Ultimately, I believe both of these companies miss the true value that leveraging technology offers to the investment industry… providing better service to people who are relying on professionals to manage their life savings and offering individualized advice when faced with difficult financial decisions.

Pure robo-firms have lowered the cost to invest, the same way ETFs did back in the early 2000’s. That’s a good thing for investors. They haven’t, however, provided a better solution to deliver personalized advice to an extremely under-served area of the investor marketplace… the mass affluent, or those who have less than $1 million in investable assets.

The real future of investment advice for this group lies somewhere between what the Wealthfront and Vanguards of the world are offering, and what the full service brokerage houses are doing at places like Merrill Lynch and Morgan Stanley.

Study after study have shown very clearly and explicitly that for most investors the extraordinary push and pull of emotions tied to investment decisions is the real cost (or drag) on earning strong annual compounded returns over time. This is the reason that an option must exist in the middle of the robo and the traditional. That’s why my partners and I developed Wela.

Wela leverages technology to deliver a low-cost investment solution while also providing access to personalized investment advice. We’re a company with real people, using technology to make our jobs easier, and more importantly, to make our clients’ experience better, simpler, and comprehensive.

On the platform, there is no fee charged to our users who simply want to aggregate and monitor their investment accounts, cash accounts, real estate values, mortgage balances, etc. We do, however, charge a fee when one of our users raises their hand and says, “Wela, I need help with this account. Can you help me manage this piece of my financial equation?” Our average Wela client pays between 0.75% – 1%, and we use no proprietary ETFs or mutual funds. We use only what our Investment Committee and technology deem to be the best, low-cost investment solution depending on your specific situation.

Clearly I have a vested interest in spreading the word about Wela, what we deem as a Digital Advisor, not a robo investment solution. There are $20 trillion of investable assets in the US right now, and with such a large pie, there is plenty of room for all types of investment strategies. A portion of that pie will always use the lowest cost provider. In the investment industry, this means the majority of clients will end up talking to a call center when they have questions, and have their portfolios managed by R2D2. On the other end of the spectrum are the investors who will always need a full service financial advisor to consistently consult on all financial matters.

It is my belief that, over time, the biggest slice of the investor pie will likely employ a thoughtful combination of R2D2 and Harrison Ford, embracing technology while also maintaining a human element as they consume financial advice. We believe a company that is able to leverage technology to more efficiently serve a broader group of people with more personalized service is ultimately going to stand the test of time.

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How To Make The Forbes 400

On another fateful car ride to my son’s elementary school, we were listening to Bloomberg Radio, and they started discussing the Forbes list of The Richest Americans. My son asked me, “How did Bill Gates get so rich?”

I told him that Gates had started a company in his garage that grew and grew until it was so large that they decided to “take it public,” meaning that they allowed anyone to buy a “piece” of the company. When they did this, Gates still owned a large portion of the company, and everyone buying their small portions of the company caused his larger portion to increase in value. It increased so much, in fact, that he became the richest man in America (and remains at the top of the list with an estimated net worth of $80 billion).

“Oh, okay. Well who is the second richest person in America?”

“That’s Warren Buffet.”

“How did he get rich?”

Then we got to break down Buffett’s journey to wealth. I told my son how Buffett made his fortune by buying up large portions of companies like the one Bill Gates started.

“Who is the third richest person in America?” 

Finally, I just pulled up the Forbes list of the richest Americans on my iPhone, and I had my son read it to me.

I noticed while we looked over this list that many of the people in America who made this list had built their wealth by participating in the stock market. Most had either started companies, bought companies or were the children of people that had started a business that went public, like Wal-Mart or Campbell’s Soup.

When I told my son this, he asked, “Why don’t you put your company in the stock market?”

I smiled and said, “That’s called an IPO. You have to reach a certain size to be able to do that.”

Using Siri, I then pulled up the stock prices of some well-known Atlanta companies. I explained that these prices reflect the cost to buy one share of each business, Coke, Home Depot, Delta, etc.  I explained that they’re called public shares because anyone can buy them and own a piece of that business.

The point in buying into these companies, becoming an investor, is a way to participate in the company’s future growth. So if you can accumulate enough shares in the right companies or the market in general, and hold those shares for long enough, someday the value can be powerful enough to allow you to “retire early” or maybe even hit the Forbes 400 list.

“You know you don’t have to take a company public or own thousands of shares in a company to make money in the stock market, though,” I said. “You can start with a small amount of money, and that’s what my company Wela tries to people do every day.”

This conversation stuck with me for the rest of the day as I thought about how much of an impact the stock market has had in many people’s lives. I love the fact that the same system that made Bill Gates and Warren Buffett billions of dollars can also help anyone in the world grow their net worth.

With so many options now in the financial industry, it’s easier than ever for people to take advantage of this system. If you’re looking to get started, I would suggest looking at some of my past articles here, and even visiting my company’s website if you’re looking to get started investing.

God bless kids for asking important questions.


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Would You Trust a Robo-Advisor with Your Money?

A few weeks ago I went to Schwab Impact in Denver, which is a conference for investment professionals and money managers. I was fortunate to listen and learn from some of my favorite people in finance like former Fed Chair Ben Bernanke and legendary investor Mario Gabelli. I couldn’t help but notice, though, that the topic that everyone wanted to talk about at the conference was “robo-advisors.”

Robo Advisory firms are a relatively new concept, emerging only a few years ago in the investment industry. A robo-advisory firm attempts to replace a traditional person-to-person interaction with algorithms and digital technology. Instead of sitting down with a financial planner at their office, a robo-advisor facilitates your investment planning primarily through your desktop or mobile device.

The way these programs typically work is that they have you open an account based on a questionnaire, and then based on your answers the algorithm tells you what assets you should be invested in. Typically these are five to ten EFT’s, and you can either take that initial advice and invest in those ETFs yourself, or you can “hire” them to use their automated system to trade, invest and re-balance your portfolio.

These often have a low-cost at somewhere between 0.25% up to 1% of your total invested capital for the year. The difference in cost typically depends on how much human interaction you receive from the company. The lower the cost, the more likely it is that you’ll only be working through your iPad.

I’m a huge believer in technology. It’s made my job easier and more efficient, so why shouldn’t it be passed on to investors? I think there’s a natural progression taking place right now in the financial industry towards offering more technology-forward options, just as there is with almost all other industries. Just think about Uber (remember my post about the Uber Economy)? Who would have guessed five years ago that technology could make finding a ride so easy?

While we’re moving towards more use of technology in the financial industry, though, I don’t think it’s time to completely discount the traditional method of meeting with a real live financial planner.

Imagine removing a “live person” in the following situation: Let’s say there is a wonderfully intelligent video program that acts as and replaces a teacher in a classroom. Effectively removing a “real live” teacher, and replacing them with technology. We now have videos based on the fundamentals of education to teach your child from kindergarten to college graduation.

While in theory this could work, it most likely would not work for everyone. If circumstances were perfect — every student full with a good night’s sleep and eager to learn — then everyone in that classroom could potentially do well.

However, we all know that’s not how life works. What happens when two children get into a fight, or one falls asleep because they stayed up too late? What about the child who has parents fighting at home and can’t focus? These are issues that can’t be addressed and corrected for by a digital video screen that teaches reading and math.

While this might sound unrelated to the investment industry, it’s actually very similar. A financial advisor or planner is there to teach, guide, and coach their clients though the most straightforward and complex times of life.

When the market starts acting up, it’s easy to get distracted, get off track, and make bad investment decisions. For most people, money (especially our life savings) is very much tied to our emotions. So when we become concerned about the world, the stock market, or a particular life event that impacts our financial situation, I believe that humans will need more than just an algorithm to turn to.

That being said, the robo-advisory industry isn’t going away. Going back to my teacher analogy, I’d say that we’ll be learning from interactive videos on a big screen, but we’ll still need a teacher in the classroom.

My company actually launched a program named Wela more than five years ago. In the past two years our team has been building Wela to compete with the newly emerging players from Silicon Valley. We’re not working to raise hundreds of millions of venture capital dollars to promote it, but instead we’re just trying to raise awareness in our local Atlanta market.

I think that everyone should have access to financial advice and information without having to pay high premiums. While Wela is a “digital advisor”, we still believe in a personalized experience. So Wela is trying to bridge the gap between having a personal tutor and being left in a classroom alone with a screen.

I’m sure in the next few years we’ll continue to hear more and more about robo-advisors. I’m glad there’s an entirely new industry based upon this new technology. I think it’s important to remember right now, though, that these newly emerging programs account for just $5 billion out of a multi-trillion dollar investment industry in the US. So right now the robo industry is the size of an ant relative to the elephant that is Wall St. and financial advice business, but this digital ant definitely has some bite.


Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.


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