When it comes to investment advice, would you trust a financial professional or a robot?
A growing number of people are choosing the latter, on the belief that algorithms can provide rational and dispassionate advice at a cost well below that of traditional advisers.
A handful of automated investment startups created in the past few years now have more than US$4 billion in assets under management, according to Forrester Research.
It is a small segment of a trillion-dollar wealth management industry but growing at a red-hot pace, Forrester analyst Bill Doyle said.
“This is a more meaningful crop of disruptors than we’ve seen for many years, really since the Internet brokerages emerged,” the analyst told reporters.
Doyle said the digital investment services appeal to young adults who lack the minimum — often US$100,000 to US$1 million — for traditional wealth managers, but who want advice or management of their investments.
Robo-adviser firms often allow customers to set their preferences and let the algorithm do the rest — trading, rebalancing and minimizing taxes.
Costs are often far less than a traditional advisory firm, which might charge 1 percent or more of a customer’s assets.
Wealthfront, the largest of the new breed, announced this month it had reached US$2 billion in assets under management in just over three years.
The California startup has an investment team led by Princeton University emeritus professor of economics Burton Malkiel, the author of a 1973 book that championed “passive” investing in low-cost indices for stocks, bonds and other assets.
The strategy is based on the idea that “active” managers rarely outperform over the long term on a broad index such as the Standard & Poor’s 500, especially when manager fees are included. These firms mainly recommend exchange-traded funds that offer these blends of assets.
Other startups including Betterment and FutureAdvisor use a similar formula — turning over daily portfolio management to an automated algorithm that selects investments based on a customer’s risk profile, age and other factors, in an effort replicate broad market returns.
“More people are searching for a technology-first automated solution,” Betterment’s Joe Ziemer said.
The New York startup launched in 2010 now has 73,000 customers and US$1.6 billion under management.
Betterment’s average customer is 36 years old but its fastest growing segment is people over 50.
The mainstream financial industry has taken notice.
The large investment firm Charles Schwab this month launched its “Intelligent Portfolios,” using a similar method, without any fees beyond the underlying investment fund costs.
Schwab is likely to quickly overtake the “pure play” automated firms but will not put them out of business, according to Doyle.
“Schwab’s entry will raise this whole market. It brings credibility to this model,” Doyle said.
However, Doyle said the large investment firms have done little to appeal to young adults with relatively small amounts to invest.
Some financial advisers argue that an algorithm can never replace the personal recommendations and hand-holding a live person can provide.
“Our conversations are deeper. We talk with people about their goals, about saving for retirement, for that home they want to buy.” National Association of Insurance and Financial Advisors president Juli McNeely said. “Sometimes my biggest job is to talk people off the bridge. When there is a market panic, they want to jump. We need to talk it through so they understand what’s happening. It’s a comfort to have someone to talk to.”
MULTIFACETED: A task force has analyzed possible scenarios and created responses to assist domestic industries in dealing with US tariffs, the economics minister said The Executive Yuan is tomorrow to announce countermeasures to US President Donald Trump’s planned reciprocal tariffs, although the details of the plan would not be made public until Monday next week, Minister of Economic Affairs J.W. Kuo (郭智輝) said yesterday. The Cabinet established an economic and trade task force in November last year to deal with US trade and tariff related issues, Kuo told reporters outside the legislature in Taipei. The task force has been analyzing and evaluating all kinds of scenarios to identify suitable responses and determine how best to assist domestic industries in managing the effects of Trump’s tariffs, he
TIGHT-LIPPED: UMC said it had no merger plans at the moment, after Nikkei Asia reported that the firm and GlobalFoundries were considering restarting merger talks United Microelectronics Corp (UMC, 聯電), the world’s No. 4 contract chipmaker, yesterday launched a new US$5 billion 12-inch chip factory in Singapore as part of its latest effort to diversify its manufacturing footprint amid growing geopolitical risks. The new factory, adjacent to UMC’s existing Singapore fab in the Pasir Res Wafer Fab Park, is scheduled to enter volume production next year, utilizing mature 22-nanometer and 28-nanometer process technologies, UMC said in a statement. The company plans to invest US$5 billion during the first phase of the new fab, which would have an installed capacity of 30,000 12-inch wafers per month, it said. The
Taiwan’s official purchasing managers’ index (PMI) last month rose 0.2 percentage points to 54.2, in a second consecutive month of expansion, thanks to front-loading demand intended to avoid potential US tariff hikes, the Chung-Hua Institution for Economic Research (CIER, 中華經濟研究院) said yesterday. While short-term demand appeared robust, uncertainties rose due to US President Donald Trump’s unpredictable trade policy, CIER president Lien Hsien-ming (連賢明) told a news conference in Taipei. Taiwan’s economy this year would be characterized by high-level fluctuations and the volatility would be wilder than most expect, Lien said Demand for electronics, particularly semiconductors, continues to benefit from US technology giants’ effort
‘SWASTICAR’: Tesla CEO Elon Musk’s close association with Donald Trump has prompted opponents to brand him a ‘Nazi’ and resulted in a dramatic drop in sales Demonstrators descended on Tesla Inc dealerships across the US, and in Europe and Canada on Saturday to protest company chief Elon Musk, who has amassed extraordinary power as a top adviser to US President Donald Trump. Waving signs with messages such as “Musk is stealing our money” and “Reclaim our country,” the protests largely took place peacefully following fiery episodes of vandalism on Tesla vehicles, dealerships and other facilities in recent weeks that US officials have denounced as terrorism. Hundreds rallied on Saturday outside the Tesla dealership in Manhattan. Some blasted Musk, the world’s richest man, while others demanded the shuttering of his