The first robo-advisors were founded in 2008, the year of the financial crisis. Their initial innovation was to rebalance investor assets within target-date funds, and give investors a modern, online interface. The strategy is essentially passive, since robo-advisors tend to buy and hold, rebalancing only when market shifts skew a portfolio’s allocations among equity, debt and other assets such as real estate investment trusts.
Before 2008, wealth management software was only sold to human financial advisors, who used it to automate their workload while charging the same fees, usually between 1% and 3% of investable assets. With the advent of robo-advisors, that product was delivered straight to consumers without intermediaries.
Today, companies like Envestnet, Black Diamond and Orion still provide rebalancing software to traditional human advisors, who have historically served clients with more than half a million in investable assets. Use of automated portfolio software among advisors became widespread about 10 years ago, in the mid-2000s.
In that first decade, though, many consumers weren’t ready to share their financial information online, and many others were simply uncomfortable entrusting software with portfolio management. myCFO ended up hiring a large team of human advisors, running an unsustainable overhead, and being acquired by BMO’s Harris Private Bank of Chicago for $30 million.
Silicon Valley saw proof that consumer habits had changed for good with the success of Mint, the online checking account aggregator that Aaron Patzer founded in 2006, and sold to Intuit in 2009 for $170 million. That success created a groundswell of support in the investment community for robo-advisors.
Robo-advisors represent a new wave of financial advice and investment management firms. They automate asset allocation and portfolio management, giving mainstream investors access to a service once reserved for high-net-worth individuals.
Robo-advisors such as Betterment and kaChing (later Wealthfront), started by managing target-date funds, while requiring investors to move their assets to a new custodian (Betterment custodies its own assets while Wealthfront custodies them on Apex).
They and other robos later added services like tax-loss harvesting. Tax-loss harvesting is when investors harvest losses they incur on the stock market, when the value of their assets goes down, by selling in the trough. They then use those losses to offset gains they experience elsewhere in their portfolio, thereby reducing their overall tax bill.
In 2010, FutureAdvisor began offering automated advice on investment and retirement accounts hosted on 1,000s of brokerages in the US. For many investors, this was their first exposure to automated investing. While FutureAdvisor’s service is similar to Betterment and Wealthfront, it also introduced some important differences.
- FutureAdvisor links to your investment and retirement accounts wherever they are, aggregates your information and provides a free investment plan.
- FutureAdvisor directly manages multiple, pre-existing brokerage and retirement accounts on major custodians like Fidelity and TD Ameritrade. That is, it doesn’t require many investors to move their assets at all.
Each advance in wealth management software is just one more step toward automating all financial advisory services. With automation, these services become scalable and accessible to more investors than ever before. Robos will soon democratize access to services like cash-flow management, tax planning, college savings and other types of investing.