On top of all of the other perks that always get discussed in the media about roboadvisors, there is one that is rarely mentioned: transparency. This may be the most crucial development that we have witnessed thus far as it will have wide-reaching ramifications across all of finance.
Why? There are thousands of Registered Investment Advisors and hundreds of thousands of reps, just here within the United States. Many of these RIAs offer different variations of services, at much different prices. How do you choose who to use? Do they easily list their fees? What about their performance? What exactly do they offer as a service?
Location is often a major reason for choosing an advisor as well as personal referrals. While referrals are important and valued, they certainly aren't the holy grail of investing. At the end of the day, proximity to an advisor and referrals don't answer the key questions listed above. In a more efficient world, customers should be able to choose an advisor based on service, cost, and performance.
So what is it about roboadvisors that may change this? Well, we know who the players are. We know the costs associated with their services. They display them quite prominently; they focus on them. Services are specifically listed on their website so it is clear to see. More importantly, the search is efficient. There are a handful of roboadvisors of any consequence which makes the comparison much easier.
The best thing about this development is that it is based on free markets and competition. Technology has fueled new business models which can compete of price and volume. No longer is a rolodex and a well-known name in town the only way to win business. Now, a better business will win business. Imagine that! Competition will continue to push down pricing and increase transparency, all of which is good for the consumer.
We can only hope that competition will remain as vibrant as ever. Just recently, we saw Wealthfront lower their minimum account size from $5,000 to $500. In a blog post by the Wealthfront CEO about fees on small accounts, Adam Nash takes a swipe at the fees associated with Betterment account holders. We love to see this and look forward to what it might help create in the future.
Despite what has been done so far, there is more to go. More transparency around the algorithms is something that should be discussed. Why is 8 asset classes better than 6? Why are specific ETFs chosen over others? Are firms making money on the ETFs you have in your portfolio? Over time, perhaps firms such as Wealthfront and Betterment will continue to compete. It is within this competition that the consumer ultimately benefits.
Change doesn't happen all at once, but in steps. More clarity in one industry may help to open the door to other transparencies throughout finance. Now that's a benefits package I can vote for.
Check out more articles written here at RoboRiches in our archives.
There are many roboadvisors to choose from; each with distinct characteristics and a wide variety of services offered. We break down the similarities and differences between these firms here at The List.