Start ups pitch automated advice at tech confab

Few expect digital disruption from firms targeting not-so-ultra wealthy

Sep 11, 2013 @ 7:58 pm

By Trevor Hunnicutt

At a gathering of geeks, bankers and even some advisers this week in New York, a chorus of developers hawked products, claiming to revitalize — with airtight security, jazzy graphics or habit-forming incentives — the way people pay for investment products, approach personal finance goals such as saving and communicate with their banks.

In timed, seven-minute pitches at the annual FinovateFall (twitter hashtag: #finovate) conference, some executives from startups also pitched software solutions for problems that vex financial advisers.

Finect Inc., for instance, provides a social-networking platform with compliance support, Place2Give uses algorithms to help advisers match their clients to philanthropic groups and Lumesis Inc. offers detailed data and compliance features for municipal bonds.

But a larger and growing cast of developers sidestepped advisers altogether in their pitches Tuesday and Wednesday, touting algorithm-driven online platforms that try to replicate the experience of getting individualized investment advice as a revelation for the vast majority of people, who lack sufficient assets to even get a call back from a wirehouse such as Merrill Lynch, Morgan Stanley or Wells Fargo Advisors.

(Don't miss: The buzz at FInovate.)

The impact of these burgeoning adviser-emulating platforms on the business of providing investment advice is ambiguous, with industry watchers and developers engaged in a long debate over whether software will supplant or supplement the role of the average, traditional financial adviser.

“The quality advisers who add value and do the right thing don't have anything to worry about,” said Simon Roy, president of Jemstep Inc., whose platform walks investors through a step-by-step process that suggests an ideal asset allocation and whether to buy, sell or hold existing investments. “It's the advisers who are not serving their clients' interest who are more at risk as this wave breaks.”

In addition to recommending what they say are superior asset allocation and investment recommendations, Mr. Roy's product and its peers, including FutureAdvisor and Financial Guard, draw attention to the cost of investment advice by laying out how management and advisory fees affect their returns.

“The asset management style doesn't really lend itself to transparency — people don't see how much they're paying,” said Grant Easterbrook, an analyst who follows the space at Corporate Insight. “It's going to make it much easier to hold advisers accountable.”

But some advisers said they would relish new competition.

“Bring it on,” said Doug Flynn, co-founder of Flynn Zito Capital Management LLC, which manages $300 million in assets in its advisory and brokerage. Mr. Flynn said his business offers high-quality, dispassionate advice and a human touch, especially in times when investors most need it — during a market rout, for example.

“How does a computer hand-hold you?” Mr. Flynn said. “How does it talk you off the ledge?”

The products have a range of features. Many begin with a simple questionnaire asking when a person intends to retire, and links with their brokerage accounts to assess their existing portfolios. The software then advises people on the trades they should make — whether to buy or sell a particular fund, for instance.

A number of startup firms have registered enthusiasm from venture capitalists and other investors. Seven of the online advisory businesses that have appeared in Finovate forums since 2009 have raised $97.5 million since February 2012, according to The Finovate Group Inc.

That funding, as well as the prospect of collaborations with existing businesses, has lifted the online advisory product class, according to Mr. Easterbrook.

He said the products have as much a prospect of expanding wealth management to a new market as challenging existing players. Bo Lu, co-founder and chief executive of FutureAdvisor, agrees.

“We're not going to have much of an impact on human financial advisers … the demand for what we as an industry do far outstrips supply right now,” Mr. Lu said. “We would love to work together with advisers on those clients that they wouldn't be able to take otherwise.”


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