Why Women Need Their Own Robo Advisor

Estimates vary, but the range is impressive nonetheless: There is anywhere from $5 trillion to $11 trillion in investable assets commanded by women today. The pie is huge, but the financial industry has long been told it does a poor job at catering to women investors, many of whom go through life underinvested and underserved.

That’s beginning to change. The latest effort to meet women investors’ needs is coming in the form of a digital advisory service, Ellevest—a firm much like robos Wealthfront and Betterment, except that this one is built specifically to serve women.

We caught up with Ellevest CIO Sylvia Kwan, who told us the story behind the firm founded by Sallie Krawcheck, former president of the Global Wealth & Investment Management division of Bank of America, and its goal to change how the industry caters to this massive market, one woman at a time.

ETF.com: Tell me a little about Ellevest. Why create a robo advisory that caters specifically to women?

Sylvia Kwan: Women generally are underinvested, especially relative to men, even though they control more than $5 trillion in investable assets. That's unfortunate, because women tend to live longer, so they need their assets to last longer.

Research has shown that women are often sitting on cash parked in savings accounts. They are also often in a lot more conservative portfolios. They take career breaks, and they also earn less. For all of these reasons, they can’t be underinvested, but they are.

We believe one of the reasons they're underinvested is that the industry isn't really serving their needs very well. There's a lot of jargon in this industry, a lot of sports analogies—“we’re trying to beat the market”—that doesn’t resonate with women.

Women aren’t looking to make the biggest pile of money they can make. They have financial goals, and they want to be investing for those goals. They don't really care whether they beat the S&P 500. They want to make sure they will retire well, or that they have the money they need to make a down payment on a house. It’s a goal-oriented approach, rather than trying to maximize returns as much as possible.

Ellevest was founded to meet what we believe are the unique needs that currently exist for women when it comes to investing. We've started from the ground up, and thoughtfully looked at what should be the investment process for a goals-based approach.

ETF.com: So in your experience, other robos and automated services like Betterment, Wealthfront and Vanguard's Personal Advisor Services are unable to properly serve women today?

Kwan: I wouldn't go as far as to say they can't or are not serving women well; I don't believe that. I think all of these firms can serve women well. But what we offer is really unique toward women. It's based on what we've heard from women about what they want and how they want to invest.

Let me give you an example. For retirement, many firms estimate how much you're going to need in retirement, and they project how your retirement assets will grow in order to achieve the retirement that you want. That's based on a savings rate, which is often based on your salary.

So, the first question is, what’s your salary? And then they make an assumption about what your salary growth is—maybe it grows with inflation, or inflation plus 1% merit, something like that. But it's basically a straight line. And that's been the traditional way to do it.

At Ellevest, we recognized that women's salary curves are very different from men's salary curves. In fact, for a woman with a bachelor's degree, her salary peaks right around 40, whereas a man's salary with the same bachelor's degree peaks at 60. The differences can be really significant, depending on the type of salary assumptions that we use, because this is long term.

We're trying to be realistic about what a woman’s salary’s going to look like. In the end it might mean you actually need to save more than a man would.

Another difference about our approach is in our forecast. We’ll show her the likelihood of achieving her goal. This is not too different from, say, Betterment and Wealthfront. But the difference is that we’re shooting for a higher likelihood of achieving her goal.

We found in speaking with women that they're looking for a higher level of certainty in their life—50/50 just doesn't feel comfortable for them. So our process centers on a standard to show a 70% likelihood of achieving their goal.

That often means you start with a lower forecast, or she might need to work another year longer, or save more along the way, but that higher probability of meeting the goal is very important to her.

ETF.com: Tell me about the investment process behind your ability to offer this level of certainty. Ellevest uses an algorithm to assess client preferences and risk tolerance, right? What goes into this algorithm?
Kwan: We don’t start with a risk questionnaire. We don't ask the typical questions, “If markets fall 20%, what would you do?” and that kind of thing. We found most women really don't know how to understand that. It's unclear whether those are effective means of determining someone's risk tolerance or risk preference.

We take a measure of what we're calling “risk capacity” that is goal-specific, and we've collaborated with Morningstar in the asset allocation and the methodology and the algorithm. Say you were saving for an emergency goal, for example. That is sacred. You shouldn't take any risk with that, so it's going to be 100% in cash so that it's liquid and there when you need it.

But say you want to save for a vacation you’ll take in five years. That’s more of a discretionary goal. For something like this, we've created short-term goal-specific portfolios that are based on, first, the time horizon of the goal, and the risk capacity of the goal. In these portfolios, you can afford to take more risk.

And for your retirement, there is an algorithm underneath that actually looks at things like your earnings power. We look at human capital, and balance that with the assets you currently have to determine the amount of risk that would be appropriate for you.

ETF.com: And all of this information goes into creating one portfolio, one asset allocation plan, customized for every individual?

Kwan: Yes. But it's not necessarily a single portfolio. It’s a holistic investment plan. We recommend specific portfolios for each goal.

ETF.com: Are you outsourcing any part of the portfolio management?

Kwan: We don't outsource. We do collaborate with Morningstar, and we license the Morningstar forecasting engine, which is fully integrated into the Ellevest algorithm. We've also collaborated with them to determine both the asset allocations and the specific ETFs.

ETF.com: Are you using only ETFs? Or are you using mutual funds as well?
Kwan: We are currently using all ETFs, except for the emergency fund, which is just FDIC cash.

ETF.com: Are you issuer-agnostic, or do you have specific issuers you're working with? And how do you select ETFs?

Kwan: We have a few ETF families, many of the same ones other advisors use: Vanguard, iShares. We also use VanEck. And for our retirement portfolios, we have a small allocation to commodities; we use the First Trust Global Tactical Commodity Strategy Fund (FTGC | C) for that.

ETF.com: Is there an account minimum? And what are the fees to invest with Ellevest?

Kwan: There is no account minimum. And the fee is 0.50%, which is not the cheapest out there, certainly. There are other digital advisors that are half that, or even lower.

But we do believe we add a lot of value. A woman can get an investment plan for free, so they don't have to invest a penny with us to get value. And the holistic approach matters. A woman can say, “I want a house and I want to retire and I want to build a business. I don't have the resources to do all three. But what if I wait two years to buy a house? Does that mean I can start my business a year earlier? Or what if I save a little bit more toward my house?’

The ability for her to customize her plan by adjusting one goal and seeing the impact on all the other goals in her plan is very powerful. That’s what we offer.

ETF.com: Is there a particular demographic you’re focusing one? Or could men invest with Ellevest too?

Kwan: Although our service is specifically billed for women, it is not exclusive. If men wanted to use our service, we wouldn’t kick them out. It's really open to everyone.

As far as demographics, initially we were thinking this would be best for women between 30 and 50, in the prime of their careers. But we have now women clients from age 20 to well over 60, which was surprising. So we're not targeting any type of age group or demographic.

ETF.com: What do you see as the biggest challenge to starting a new robo advisory today?

Kwan: It's a great question. The biggest challenge, really, is getting the word out, and getting the word out about what's different about you. There are so many robo advisors out there today, and clearly there are some frontrunners who have gotten a lot of visibility, like Betterment and Wealthfront, Schwab and Vanguard.

Many others are jumping in now, and without a big name, it will be difficult to get the visibility they need, and to help potential investors understand their unique value proposition.

Contact Cinthia Murphy at [email protected].