Online financial adviser Wealthfront Inc. has passed $500 million in assets under management, putting it at the lead of "robo-adviser" offerings that also include Betterment (which recently reported $360 million of AUM) and Personal Capital Corp. (over $200 million of AUM).
To say the least, at these sizes, it becomes increasingly difficult to ignore the strides that robo-advisers are making.
Yet at the same time, Wealthfront chief operating officer Adam Nash emphasizes that Wealthfront's clientele is disproportionately from Silicon Valley, where Wealthfront itself has set its roots; the companies where Wealthfront has the most clients include Google, Facebook, LinkedIn, Microsoft, Twitter, and other tech heavyweights. A separate article on the Wealthfront announcement notes that some 55% of Wealthfront clients are under the age of 35.
Such a uniquely focused clientele raises the question — especially in the context of Wealthfront — about whether in the end, the company is providing a service that will really go mainstream and challenge advisers, or if the truth is simply that the company has found a bona fide niche as a technology-enabled investment solution for Silicon Valley techies. To succeed in such a niche doesn't invalidate Wealthfront's model, but it does suggest that Wealthfront may find it more difficult to grow once it has saturated its Silicon Valley techie target market.
And of course, the fact remains that at its billing schedule, it's not even clear if Wealthfront is breaking even yet as an entity, despite its half billion dollars in AUM. With a fee schedule at only 0.25% — and free for the first $10,000 of assets — at best, the company is only generating annualized revenue of $1.25 million on its $500 million+ in AUM, and having dozens of engineers and programmers is expensive.
Nonetheless, as I've predicted, 2014 may well be the year we see some refinement in the area of robo-advisers, where some begin to pull ahead and others start to fall behind. Wealthfront is growing, Betterment just put out its first research about how successful it's been in closing the behavior gap for its clientele, and other tools like SigFig are trying to get in on the action as well. Clearly, given the growth pace, the robo-advisers are serving some need, though it's not entirely clear if they're competing with advisers, or simply reaching a clientele that advisers weren't serving or reaching anyway.
Ultimately, though, the jury on robo-advisers will still be out until we see how many — if any — survive when the first real bear market comes along, or whether in the end the robo-advisers will be no threat to real advisers who have the relationships that keep their clients on course in times of stress.
Michael Kitces is a partner and the director of research for Pinnacle Advisory Group, and publisher of the financial planning industry blog Nerd's Eye View. You can follow him on Twitter at @MichaelKitces, or connect with him on Google+.