Washington--When it comes to investment advice, would you trust a financial professional or a robot?
A growing number of people are choosing the latter, on the belief that algorithms can provide rational and dispassionate advice at a cost well below that of traditional advisors.
A handful of automated investment startups created in the past few years now have more than $4 billion in assets under management, according to Forrester Research.
It's a small segment of a trillion-dollar wealth management industry but growing at a red-hot pace, Forrester analyst Bill Doyle said.
"This is a more meaningful crop of disruptors than we've seen for many years, really since the Internet brokerages emerged," he told AFP.
Doyle said the digital investment services appeal to young adults who lack the minimum -- often $100,000 to $1 million -- for traditional wealth managers, but who want advice or management of their investments.
Robo-advisor firms often allow customers to set their preferences and let the algorithm do the rest -- trading, rebalancing and minimizing taxes.
Costs are often far less than a traditional advisory firm, which may charge one percent or more of a customer's assets.
"These upstarts have simple uncomplicated offers, often for markets that are not being served effectively by incumbent firms," Doyle said.
On the Bogleheads investment forum, one contributor claimed to be happy with the "low fees with a lot of added value" at one firm and the "Silicon Valley viewpoint on investing."
- Jumping to $2 billion -
Wealthfront, the largest of the new breed, announced this month it had reach $2 billion in assets under management in just over three years.
The California startup has an investment team led by Burton Malkiel, an emeritus professor of economics at Princeton University and author of a 1973 book that championed "passive" investing in low-cost indexes for stocks, bonds and other assets.
The strategy is based on the idea that "active" managers rarely outperform over the long term a broad index such as the Standard & Poor's 500, especially when manager fees are included.
These firms mainly recommend exchange-traded funds (ETFs) that offer these blends of assets.
"Investors are sick of the lack of transparency from traditional financial services," Wealthfront chief executive Adam Nash said in a blog post.
"For too long, this industry has made too much of its revenue on the backs of those who can least afford it."
Other startups including Betterment and FutureAdvisor use a similar formula -- turning over daily portfolio management to an automated algorithm that selects investments based on a customer's risk profile, age and other factors, in an effort replicate broad market returns.
AFP
