Rick Ferri, one of the most well-known index investors in the world, is launching a robo advisory this summer. His goal is simple: to reach younger investors.
The founder and managing partner of Portfolio Solutions has been hugely successful in the traditional advisory channel, managing today some $1.4 billion in assets in a lineup of portfolios that comprise ETFs and mutual funds. But Ferri says this younger demographic doesn’t necessarily want to pay for advice, nor can it afford account minimums at most advisories.
Consider the success of firms such as Wealthfront and Betterment. These robo advisors have become the poster children of cheap index investing with a 21st-century technological twist, capturing the benefits of a buy-hold-and-rebalance approach to money management through a fully automated, low-cost service aimed at smaller investors. Some even offer automated tax-loss harvesting.
“The landscape is different today,” Ferri told ETF.com. “I’m not under the illusion that we are going to make a lot money with this, but we are building a reputation, and once investors build wealth, they might want to slide over to the full-advice model. There’ll be continuity, which is not available at other robo advisors today.”
Ferri is the latest flesh-and-bone advisor to take the plunge into the tech-driven world of automated money management targeted at younger investors. Before him, Josh Brown, chief executive officer of wealth management firm Ritholtz Wealth, launched a robo advisory named Liftoff last fall.
Also, Ric Edelman, the well-known advisor of Edelman Financials, launched his Edelman Online unit to help take his $14 billion in assets of traditional advisory business into the future. Schwab, too, has a robo service. The list goes on.
Smaller Accounts Mean Fewer Bucks
What’s at stake here is an up-and-coming generation of investors that’s larger than the baby boomer generation. Millennials, as they are called, are tech savvy, and they’ve already lived through two major economic downturns. Many see little value in human advice. Instead, they subscribe to automated low-cost index-based investing.
At Wealthfront, for example, 60 percent of its investor base is 35 years old or younger. Some 90 percent are under the age of 50. And the firm, which charges 25 basis points a year in management fees—$25 for each $10,000 invested—has gathered $2.3 billion in assets in less than three years.
Many of the account sizes in these robo advisories average less than $10,000. Ferri’s robo advisory will require only a $5,000 minimum investment, while his traditional shop requires $1 million. Pricing will also be equally as competitive, he says.
Ferri plans to charge the same 25 basis points he charges at Portfolio Solutions, and for the same portfolios. But the automated service won’t have the 12 basis points in advice fees associated with his original business.
Investor choice will range between an all-ETF simple beta portfolio that will come free of any transactions costs, to an all-mutual-fund/multifactor portfolio that will come with extremely low asset-based pricing in lieu of commissions associated with these funds. He declined to immediately elaborate.
“We want to get our name down in a demographic that doesn’t know our name yet,” Ferri said. “Many of them might want to invest with us but can’t afford even the 37 basis points because of account minimums.”
Can’t Beat Them, Join Them?
In a broader sense, Ferri’s move adds fodder to the thinking that the so-called robo advisors could pose a serious threat to the traditional advisory model.
Edelman, whose $14 billion advisory business has made him one of the most prominent traditional advisors today, recently said that robo advisors would put half of all existing human advisors out of business in the next decade—unless they were willing to reinvent themselves in the face of new technologies.
Not Everyone Buys It
While Ferri’s latest move underscores the growing trend of advisors-turned-robos, there are those who think this type of approach may be appealing to younger money, but only really works for plain-vanilla index investing and for people with relatively simple financial challenges and goals.
“On one level, robo advisors are a competitive threat,” Sean Clark, chief investment officer of Clark Capital, recently told ETF.com. “But I also think there’s a different client or investor who is using a rob advisor than, say, an investor-client who would be using a firm like ours or any other ETF strategist, asset manager and/or financial advisor.”
Clark Capital is known for managing asset allocation with a somewhat tactical way, in a hands-on approach that has a $2-billion-plus following.
“For the most part, those are young people getting started and millennials who are really in tune with technology,” Clark said.
In his view, these younger do-it-yourselfers will eventually come to more wealth later in life, and require more carefully thought-out advice on portfolio construction.
“Down the road, investors who are using robo advisors right now who have to deal with wealth transfers from their parents will suddenly have to deal with a big pot of money that they have to invest,” Clark said.
“The complications that come with that—tax needs, insurance needs, trust need—are going to lead them to seek advice from advisors to do that,” he added.