More and more people are letting computers, rather than people, make their investment decisions.
Many investors are already phasing out the human touch, shunning traditional mutual funds for exchange traded funds (ETFs), in which managers pick an index of stocks that follow a sector.
“The reason why you see the outflows in mutual funds and the inflows in ETFs is because the mutual fund structure is not working, plain and simple,” said Martin Mickus, founder of the startup CrowdInvest. Mickus wants to remove the experts from the ETF process as well, by choosing the stocks in the index based on input from regular people, rather than an expert fund manager.
“Any index that’s out there that’s decided by a small group of people,” said Mickus, “I think can be better addressed by using the wisdom of the crowd.”
He’s relying on a theory that a crowd, even an uninformed one, will be smarter than an individual — in this case, an individual fund manager.
There’s an opening for companies like this because younger investors, particularly millennials, are shunning traditional investing just as they are reaching the point in their lives when their earnings or inheritances would normally shift them toward financial planners.
“There’s going to be a $35-$40 trillion transfer of wealth between [baby boomers] and their sons, their daughters, their grandchildren,” said Jim Weddle, managing partner at Edward Jones investments, which works mainly with baby boomers.
But Weddle added the siphoning off of younger people by online competitors has been a bit of a kick in the pants for the industry, pushing legacy companies to build more robust online platforms and find new ways of engaging with younger clients.
Weddle encourages his agents to build relationships early, like meeting with the children of clients when they are home visiting from college or arranging remote meetings via video conference rather than asking clients to come into the office.
At Sagevest Wealth Management in McLean, Virginia, most of the clients are older as well and seek advice on things like how to invest their retirement portfolios. Similar services are offered online and cheaper by so-called robo-advisors. Jennifer Myers, president of Sagevest, said she doesn’t mind — or feel threatened by — the online competition.
“I think it’s helping to fill a market void, and I’m happy that it’s there,” she said. “I just think investors need to be educated whether or not it’s appropriate for them.”
Myers said she would prefer online services for younger or middle-income investors who may not have the high minimums needed to work with a human financial planner. Many planners require $100,000 to $500,000 in assets before they will work with clients, limiting their services to people nearing retirement or those with very high incomes.
Myers compares the robo-advisors to tax preparation software. While the services pushed some human tax preparers out of the market, she said the services really only works well if your situation is pretty simple.
Correction: An earlier version of this story misstated the asset requirement of many financial planners. The copy has been corrected.
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