Advisors focused on investment management were the first to feel the heat of algorithms, now those focused on financial planning could be next. Wealthfront’s new financial planning freemium model is a sign that automated advice platforms are beginning to feel satisfied enough with their investment management—even though the latest robos are yet to be tested by a down market—that they’re building algorithms for goals-based financial planning. Given the fee-compression they’re facing, advisors have reason to question how resilient the pillar of financial planning will be against the eroding currents of computer science.
Impressed by Wealthfront’s announcement to offer financial planning without forcing a user to fund an investment account, Heike van den Hoevel, senior wealth management analyst at GlobalData, said the move positions the company for growth. “Making higher-value services, such as pension advice, available free of charge will allow Wealthfront to widen its customer base and take away market share from traditional players,” she said. “Our data shows that cost of advice is a big deterrent.”
While few investors surveyed by GlobalData see a robo advisor as a primary investment provider, a fifth of global mass affluent investors have used robo advice at some point. And advisors should expect the trend of investors experimenting with robo advice to continue, said van den Hoevel. “Advances in artificial intelligence will drive automation of aspects of the financial planning process, which in turn will empower consumers to manage a wider array of their financial lives independently,” she added. “As algorithms continue to evolve, the proportion of investors that regard their robo advisor as their primary investment channel is set to rise.”
That’s the plan at Wealthfront. The company has not been shy about its plans to be a one-stop wealth manager, with a goal of receiving clients’ paychecks, automating the regular payments they need to make and investing the leftovers. It’s focused on breaking down the components behind goals-based investing, aiming to provide the same planning advice directly to consumers as a human advisor does when armed with similar aggregation tools and planning technology.
The company’s financial planning engine, Path, can already answer over 10,000 financial questions, said Wealthfront. Top questions range from the basic, “What is my net worth going to be at retirement?” to the specific, “Can I afford a three-bedroom apartment on the Upper East Side of New York City in five years?” Notably, Path excludes planning decisions like taking time away from work to start a family, managing a divorce or preparing to start a business, but still addresses the basics of goals-based planning, like retirement, college savings and buying a home.
One of financial planning’s biggest evangelists, Michael Kitces, the co-founder of XY Planning Network, called the freemium model “embarrassing” in a social media post.
“Wealthfront is now trying to disrupt human advisors by offering free financial planning as a loss leader for a managed account [with] proprietary products,” Kitces said, calling it a model from the 1980s. “Why not offer BUNDLED service for a unified fee, rather than positioning [financial planning] as a free loss leader?”
It’s a fundamental difference of philosophies: given that goals-based financial planning is largely a rules-based exercise based on numbers and probabilities anyway, Wealthfront doesn’t see a need for human beings to deliver it. By making access to Path free and putting it in front of the account-opening process, Wealthfront is hoping to be able to gather more data on what financial planning questions potential customers are asking, as well as bringing in more clients and assets.
Wealthfront has some numbers on the latter. Engaging with Path led to higher savings rates, and therefore more assets under management, according to company data. “We definitely feel confident that we can delight these customers and clients who come in for the planning enough that they’ll want to stay around and send [Wealthfront] their other services as well,” said company spokesperson Kate Wauck. “There are business implications.” The company has more than $11 billion in AUM, according to its most recent regulatory filing.
From a lead-generation standpoint, it’s a smart maneuver, said John Wise, CEO of digital wealth platform provider InvestCloud. But, advisors should still be in good shape, as long as they’re offering financial planning services, he said. Wealthfront’s free financial planning, however, will force advisors to become more sophisticated in their planning offerings. “In three to five years you won’t even be talking to an advisor without having some sort of financial planning,” he added.
That’s also assuming Wealthfront’s customers would’ve wanted to engage with a human advisor in the first place. The company is attracting customers who wouldn’t have hired a human financial advisor anyway, said Kitces, characterizing the move as “competition for other do-it-yourself platforms like Schwab or Vanguard.”
“Wealthfront looks more like they’re copying the existing industry incumbents and playing catch-up than actually doing anything different and unique here,” Kitces added. But advisors are still worried about competition from automated products and companies like Charles Schwab that are making efforts to reassure anxious advisors that their own version of robo advice will not encroach on human advisors’ lines of business.
Human advisors who show more humanity should have an advantage, said Wise. “Digital empathy” is a limiting factor for software. “It’s not just computation that’s important, it’s digital empathy. How empathetic is the experience to you, the user?” he asked.
“Life zigs and zags. The fact that robo services cannot plan for the unexpected makes it hard for me to take them seriously as a truly competitive model for long-term financial advice,” said Anthony Stich, COO at financial planning software firm Advicent. “What if you or your spouse are in a severe car accident? What if you unexpectedly come into a substantial sum of money that will entirely change your tax strategy?”
In other words, Path may end up being the best of the many free planning calculators that litter the web, say advisor advocates; but, until developers can code for the unexpected, it is still just a tool.