A few weeks ago I read an article that made the bold claim that passive investing would be free within 5 years.
I found the idea interesting so I wrote a post citing said article about the fact that the nuts and bolts of investing (fees and ease of access) continues to improve for smaller investors.
After running my post I traded a few emails with the author of the article, Herbert Moore, CEO and co-founder of start-up online investment advisor WiseBanyan. Moore and I both seem to share an affinity for the benefits that low costs can have on your portfolio.
Our email discussion led me to take a closer look into WiseBanyan as I became intrigued by the company’s tag line, “The world’s first free financial advisor.”
I asked Moore if he would be up for answering some questions I had about his firm. What follows are his answers to those questions, after which I will share some of my thoughts on robo-advisors in general.
Give us a little bit on your background and how this led to the formation of WiseBanyan?
My co-founder and I have worked in the financial service industry our entire careers. Oftentimes friends and family would ask us about how they should invest and we repeatedly saw the same challenges that they were facing: high fees, steep account minimums, and the hassles of starting an investment portfolio. We just didn’t see any good options out there that eliminated these hurdles, so we set out to create WiseBanyan.
With WiseBanyan, we wanted to make sure that everyone could start investing as early as possible. We believe in creating well-diversified, sustainable portfolios (we do this by using low-cost index funds), and want to make sure as many people as possible have access to quality investing.
Why did you decide to include the proverbial “little guy” at WiseBanyan and offer your services to investors of all sizes?
There is a great quote: “The single most valuable asset you have as an investor is time. A 20-year-old has an asset Warren Buffett couldn’t dream about.” It’s by the Motley Fool of all places, but it is very true in that investing earlier is incredibly powerful. It was very important for us to try to make WiseBanyan accessible to investors of all levels, regardless of how much money an individual has to invest now, we allow them to invest sooner and reach their goals earlier. However, this idea of democratization has resonated not just with the little guy, as we have had people opening accounts with initial deposits ranging from $10 to $50,000.
How does WiseBanyan differ from other online-only financial advisors such as Betterment and Wealthfront?
First, we are the only free investment advisor. When we looked at the industry, we felt that moving from a traditional fee structure of 0.50% – 1% down to 0.35% really wasn’t all that revolutionary. By completely eliminating the fee we are aiming to demonstrate the power of automation.
Second, our minimums are much lower (because we have none). While Wealthfront has a $5,000 minimum (they don’t offer fractional shares like WiseBanyan), and Betterment charges a monthly maintenance fee if you have less than a certain threshold and don’t meet their automatic contribution requirements. This can really hurt an investor with a smaller portfolio. For example, if you have a $500 account with Betterment with a $50 monthly contribution, they are charging you $3 per month. That equals $36 per year or a ~7.2% management fee annually, and this is a step in the wrong direction. We don’t require a minimum deposit or a monthly deposit, because our goal is to make investing and achieving your financial goals truly accessible to everybody.
How did you develop your risk tolerance questionnaire and what are the most important determinants of a client’s asset allocation?
When we created our risk tolerance questionnaire, we focused on replicating the conversation that any good investment advisor has with his or her client. Though there are multiple dimensions of each, the three primary factors we are trying to assess are each client’s time horizon, size of investment relative to his or her net worth and earning potential, and the level of natural aversion towards risk. The first two factors are relatively straightforward, while the third can be somewhat difficult to assess. To better understand whether a client places more importance on minimizing risk or maximizing returns, we also ask scenario-based questions to understand how our client reactions to potential market changes.
How do you plan to update client plans as their circumstances and risk profiles change over time?
This is a great question – if a client starts to invest for retirement at 20, he should not have the same portfolio when he is 50, or even 30. As a client gets older, we adjust the portfolio to reflect the shortening time horizon. Similarly, if the financial circumstances of a client changes, this information should be incorporated into the portfolio as well. An investment that was created to serve as a long-term plan, but is now being used to save up for a one-time purchase, should reflect the cash needs and risk tolerance change.
How often will clients be updated on portfolio performance?
Clients can login to their account 24/7 and see their current portfolio holdings, updated performance, and all of their past performance. From this dashboard, they can also add or withdraw funds and also easily add or modify any auto-contributions that they have setup. Then at the end of each year we also distribute tax forms.
It looks like there is currently a wait list for your service. When do you expect the platform to go live?
We are live right now! We are very excited with the amount of people signing up for our service – over 1,000 people signing up each week, and we have been using the waitlist to control the flow of clients onto our site. We are letting people off of the waitlist every day, and anybody who refers 10 friends can skip the line and gets off the waitlist immediately.
Does WiseBanyan have investor-backing or are you making personal investments to fund operations?
We have not raised funding yet – we are currently funded by personal investments. With our passion for our mission to help people achieve their financial goals as early as possible and for free, we have prioritized product development and infrastructure. With the incredible interest that we have seen in our service, we anticipate a funding round this year to expand our offering.
MY THOUGHTS ON ROBO-ADVISORS
I’d like to thank Herbert for taking the time to answer my questions. I think it’s a really interesting proposition.
Building an automated, diversified, low-cost portfolio that is periodically rebalanced can be tough to do for those with low amounts of money to invest. Even targetdate funds normally come with minimum contribution limits.
Others are just too busy or don’t have the portfolio size to hire a legitimate advisor. Plus, the majority of investors don’t have the required knowhow to set up and maintain a diversified portfolio.
Is the robo-advisor model perfect? Of course not.
As many in the finance industry have pointed out (myself included), behavior still matters.
Yet you have to start somewhere, and having a rules-based system that enforces good behavior is a great place to start.
There is no one-size-fits-all way to invest. I can think of much worse ways to invest than through a diversified portfolio with automated contribution and rebalancing decisions. Minimizing mistakes and costs can be much more helpful for your portfolio than the strategy you choose to implement.
It really comes down your personal circumstances and risk tolerance.
In the end, small investors are the big winners from the development of robo-advisors as costs continue to fall. There are now legitimate options for those that can’t afford a financial advisor or would like to put their investment strategy on autopilot.
There can be a place in the industry for both robo-advisors and traditional financial advisors to serve their respective clients. I think these robo-advisors could actually help the brick and mortar advisors.
Online investing platforms can help small investors become more comfortable investing in financial markets. These platforms could eventually lead to a handoff to traditional financial advisors down the road.
Those that need more of a personal touch after they grow their wealth can move on to an advisor that is able to offer more targeted services and the relationship aspect many desire.
Either way I love the fact that young people in the finance industry are trying to shake things up and do what’s right for the investor with low costs in mind.
Check out WiseBanyan for yourself:
Follow me on Twitter: @awealthofcs
Disclaimer: I have no affiliation with WiseBanyan in any way. This is simply a look into their process. You need to make your portfolio decisions based on your own unique circumstances when deciding to use any type of financial advisor, as always.