Wealthfront, Edelman clash on robo-advisers

Well-known RIA says upstart online wealth management platforms could put advisers out of business

Jan 27, 2015 @ 1:48 pm

By Trevor Hunnicutt

The old guard of wealth management clashed with the new in Hollywood, Fla., on Tuesday, as Ric Edelman delivered a bleak assessment of his peers' future during a spirited debate with the top executive at Wealthfront Inc.

Mr. Edelman confronted his fellow panelist, Wealthfront's Adam Nash, at ETF.com's Inside ETFs conference over what he said was a “disingenuous” claim from Mr. Nash that low-cost online wealth management platforms called robo-advisers would not put financial advisers out of business.

“Adam's going to put most of you out of business — it's as simple as that,” Mr. Edelman said. “More than half of advisory firms will be gone."

The well-known financial adviser later amended his statement to add that Wealthfront itself could fail when faced with the test of a bear market.

But similar offerings, such as development of a Charles Schwab Corp. platform and a Vanguard Group Inc. platform, will change the way advisers have to work in order to grow their businesses.

Mr. Nash said financial firms provide an “endless litany of incredible services that are currently now restricted” to the wealthiest investors. He said his company is working to build a firm that can best serve clients who don't meet the asset minimums assessed by financial advisers.

But Mr. Edelman said online offerings cannot yet respond to the behavioral biases of their clients in the way human advisers can. And he questioned whether Wealthfront was on a path to profitability.

Asked if the firm makes money, Mr. Nash grasped Mr. Edelman's arm and said Wealthfront is making money “every day.” But Mr. Edelman returned the gesture and suggested the firm is losing much more money on a daily basis than it's taking in.

Mr. Nash then accused Mr. Edelman of being “silly” and said that as a startup, the firm's long-term priorities mattered more than short-term profitability. In the long run, the firm's costs are sustainable if it continues to grow, according to Mr. Nash.

Of the venture capitalists backing Wealthfront, Mr. Nash said “the ones who invest in us have actually been more right than wrong.”

Even without the conflict, the juxtaposition of Mr. Edelman and Mr. Nash was a striking illustration of the wealth management business' evolution.

Mr. Edelman is an adviser who built one of the nation's largest independent wealth management franchises on the back of financial advice delivered on a radio show and in regular television appearances aimed at a middle-brow audience. Mr. Edelman, who founded his business in 1987, has in recent years built his own online managed-accounts offering.

Mr. Nash is a former LinkedIn and eBay executive, who, since taking an executive role at the Silicon Valley startup in 2012, has become a passionate advocate of automated financial counseling based on investing principles in the fashion of John C. Bogle and Burton G. Malkiel. He has helped lead the firm to become one of the largest of its kind. Many of the firm's clients are young and work in the technology industry. (Mr. Malkiel is the firm's chief investment officer.)

Both men are important figures in the ETF business and both manage significant assets — Wealthfront $1.8 billion, Mr. Edelman $13 billion, according to regulatory filings — and many of those assets are deployed in the index-tracking investments made popular by Mr. Bogle.

Robo-advisers, and their potentials and dangers to traditional financial advisers, have been a topic of several sessions at this exchange-traded fund industry conference.

“There are new competitive pressures coming on” advisers, said Martha G. King, who runs Vanguard's adviser-services division, in an interview. “It does open up possibilities. It's not all about playing defense."


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