Robo Advisors

Personally, I dislike the term "robo advisor" - it's cold and unappealing. If you haven't yet heard of them, robo advisors are the recent crop of companies that manage your portfolio with minimal work on your part. They're basically financial advisors in the form of software. Some you might be familiar with include Betterment, Wealthfront, and SigFig.

If you follow VC funding, you'll know that many of these financial startups are getting many rounds of venture funding. It's obvious that these VC investors believe robo advisor's are the future of consumer investment spending, and have a high growth potential. While I agree that huge growth will come from these algorithmic portfolio management techniques, traditional investment banks will not pass this opportunity up. Thus, these startups will face heavy competition from traditional banks as they start to catch up.

Charles Schwab has already announced the launch their robo advisor next quarter, which will be free for Charles Schwab customers with $5,000 or more to invest (which is a measly amount, considering what other robo advisors require). You can be sure that similar financial services companies will follow suite, and offer identical services for very cheaply, or even free. The additional overhead to launch such a robo advisor service is relatively inexpensive, as it only requires creating and maintaining an algorithm that covers many customers (the costs are grossly simplified, but the point remains). And since nearly all of these financial services companies already have more customers than startups like Betterment and Wealthfront, they can spread their costs over more people, and pass those lower costs through lower service fees. This will put the financial startups in a very bad place.

Of course, VC's aren't vacuous and know this, but they have a greater tolerance for risk than you and I. I would wait before investing money with the startups to see the fees charged by the traditional companies. It's the fees that will get you, since the returns will be practically the same for everybody. Overall, I'm bullish on robo advisors, since they will make investing much more accessible to the average investor. And if the algorithms are good, they'll make the risk low too, which will be a clear win for consumers.