Does anyone really need a wealth manager anymore?

We're at a tipping point with robo-advisory businesses offering free service and support to all kinds of investors — high net worth or not.
25 October 2018

Are wealth managers going to become obsolete? Source: Shutterstock

Back in the day, high and ultra high net worth individuals (HNWs and UHNWs) would each be assigned a wealth manager to help them better manage their finances and personally cater to their individual needs.

Although originally a European concept, it has gained popularity across the globe — helping wealth managers thrive over the past few decades. However, the industry isn’t perfect.

Unlike other businesses, the wealth management industry doesn’t typically charge clients a fee. Instead, they earn a commission each time an investment product is sold to their clients.

This model causes a conflict of interest between wealth managers and their clients as the former have an incentive to pull client’s money away from one investment vehicle and put it into another just to meet their revenue targets, while the client loses out each time their portfolio is “churned”.

And although it’s something regulators are fighting with new laws and regulations since the financial crisis of 2008, tech companies seem to have another solution.

One that disrupts the industry, makes wealth managers obsolete, helps clients earn a better return (via automated, unbiased investment advice), and provides transparency to the entire ecosystem — all at once.

Launched in the same year as the financial crisis, companies like Betterment and Wealthfront started providing advice via algorithms. The industry dubbed these as “robo-advisors” and some clients jumped ship immediately.

Others waited. For almost a decade, until now, when these new-age investment companies are taking charge of more portfolios of UHNWs, HNWs, and even retail clients (who previously couldn’t get any valuable investment advice because banks deemed their portfolios to be too small to merit the attention of the few advisors they had on staff).

Well, having captured quite a bit of the UHNW and HNW market (and this is only going to grow in the future say experts), robo-advisors are now capturing the lower end of the market as well — providing (trustworthy) advice and support to retail customers, many of whom are slowly trying to develop a savings habit (especially in this part of the world).

Now here’s the tipping point: Wealthfront has decided to offer automated financial planning tool for free.

According to Reuters, one of the largest digital wealth management startups, Wealthfront, will offer its automated financial planning tool for free by the end of the year as it seeks to grow its customer base.

Individuals in the US who don’t use Wealthfront will still be able to connect their various financial accounts to the company’s Path tool, and calculate their saving and spending rates to understand how to build a better retirement plan for themselves.

The company already manages US$11 billion in assets under management (AUM) and hopes that offering the service for free will attract new users who experience Wealthfront and fall in love with the way they manage money — transparently, for a fixed (small) fee.

Some experts forecast that by 2025, just the top three robo-advisors will collectively have more than 250 billion in AUM — and Wealthfront’s announcement is just the catalysts that individuals doubting the capabilities of an algorithm-based investment manager need before they sign up.

So, ask yourself, do we need wealth managers anymore?