Robo-Advisers

n 2014, U.S. robo-adviser services managed $16 billion in assets. By the end of 2015, that had jumped to $50 billion. By one estimate, the market will grow to $2.2 trillion by 2020. The field was pioneered by startups like Wealthfront of Silicon Valley and Betterment of New York, but much of the new growth is now being grabbed by traditional giants in money management. Charles Schwab started its automated version in March 2015, reeling in $5.3 billion by year-end. The world’s largest mutual fund manager, Vanguard, entered in May with a part-robo, part-human service, which attracted $12 billion in its first eight months, while Fidelity is testing automated portfolio services on its existing clients. And BlackRock, the world’s largest asset manager, agreed to buy FutureAdvisor in August. Banks including Bank of America, Morgan Stanley and Wells Fargo are currently developing technologies around online investment advice that may roll out later this year. The technology is also emerging in Europe and Asia. In response, Wealthfront and Betterment are racing to add new features, while another startup, Financial Guard, is striking partnerships with credit unions. In March, Betterment raised $100 million in investor funding, increasing its valuation to $700 million.

In the U.S., financial advisers have been regulated under a law passed in response to perceived abuses in the stock market boom that led to the 1929 crash and the Depression. For decades, many investors got their tips from brokers at banks or insurance companies who earned commissions for selling their firm’s investment products. It’s a situation that both in the U.S. and elsewhere has led to complaints of conflicts of interest, and to a U.S. Labor Department rule requiring advisers handling retirement funds to act as fiduciaries, meaning they must put their clients’ interests first. Many American investors have turned to advisers who charge a flat fee, most commonly 1 percent of a client’s assets under management. In general, traditional advisers only serve customers with significant savings, often at least $250,000, or in some cases millions. Betterment has no minimum; Wealthfront’s is $500. Potential clients answer a few questions online about things like their age, salary and financial goals. Computer algorithms then propose one of several cookie-cutter portfolios — such as 40 percent in stocks and 60 percent in bonds for someone who said their first priority is having a safety net. The services usually use a range of exchange traded funds, or ETFs, which invest in stocks, bonds and other assets such as natural resources, municipal bonds and foreign stocks.

The U.S. Securities and Exchange Commission in 2015 cautioned investors that an automated program might not fit their needs or might be built on faulty assumptions. More recently, the top securities regulator in Massachusetts questioned whether an automated program could act in a client’s best interest if it knows so little about an investor

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