Is there room for traditional as well as automated approaches? Or do retail investors need both? Edelman recently shared his views with ETF.com in an interview, arguing that robo advisors don’t own the future. Here, Nash shares his take.
ETF.com: You and Ric Edelman will be discussing the future of the advisory business at Inside ETFs next month. What's the main message you're hoping to get across in Florida?
Adam Nash: Wealthfront is only 3 years old, but for the first two years, I think there were a lot of skeptics about this idea that automated investment services will be something that will be adopted by the consumer market. That changed this year. I'm on the record saying that in the next decade, everyone will be using some form of automated investment service.
We've had the fortunate history of leading through innovation. A lot of the features we initially launched have become the defining features of this emerging category, and we feel we've been rewarded by the markets with a lot of growth and success. We're already over $1.7 billion in assets at three years. For perspective, it took Charles Schwab about six years to hit $1 billion in AUM.
That's a high-line message—the importance of the automated investment service, and what it means for investors in terms of getting better value at lower prices than they've gotten before.
ETF.com: We've seen a number of traditional advisory businesses launch automated portfolios as another option for their clients. Edelman does it; Schwab and Fidelity are both going in that direction. Do investors need different approaches at different stages in life?
Nash: I certainly think we're seeing that today. What we're seeing at Wealthfront is that the automated investment service today is very much focused on the millennial investor. We have grown more than 17 times in the last two years. But one thing that hasn't changed is that over 60 percent of our clients are under 35; more than 90 percent are under 50.
That’s because right now there are two very different, large, important generations moving through the system. You have the baby boomers, which are not as big as the millennials in terms of number of people, but certainly much larger in terms of assets. And they're hitting a critical decade or two where they have to figure out one of the hardest financial problems that exists, which is how to transition into retirement. There's a whole list of questions and issues that arise from that.
Because there's so much at stake, there's an amazing amount of firms that are focusing on trying to help the baby-boomer generation with its series of financial issues.
At Wealthfront, we see that the millennial generation, which is technically larger, totals less than one-tenth the amount of assets of baby boomers. This generation is looking for something different. It has a different set of financial issues. It has a different set of opinions about the financial markets. And it grew up with software and technology, and appreciates the idea of an automated investment service.
So, a lot of the talk about a “stage of life” or “generation” is true today. But in terms of what people will be using 10, 20, 30 years from now, the features of the automated investment service make too much sense not to see it for the long term.
It's a little bit like in the '90s and the whole revolution that happened around e-commerce then. We see similar trends going forward around the area of investing, particularly in terms of taking care of retail investors.
ETF.com: Now, Edelman told us that there's no such thing as an algorithm that would protect investors from panicking and making emotional decisions about their money. What do you say to that?
Nash: I would argue the opposite. I actually think the history of technology has been very, very good about helping humans deal with difficult situations.
I can give you a simple example: When I went to driving school, they taught you that in the rain, if you hit a big puddle, you want to pump your brakes so as not to skid. They don't teach that anymore because, with anti-lock brakes, an automated system ensures that if you just hit the brakes in the rain, you don't lock up and glide on the puddle. That's a much better way to ensure that in a highly emotional situation people end up doing the right thing. That innovation saves lives.
Here we're obviously not talking about saving lives; but managing people's money is an incredibly important problem. We have decades of research that show that individual investors, left to their own devices, are doing a very bad job making decisions about money. I definitely believe that automated systems can help tremendously with a whole range of decisions, ranging from small to large.