In the past few years there’s been many new investment firms created such as Wealthfront, Betterment, Personal Capital, and many others, that claim to use technology to create better portfolios at a fraction of the cost.  They eliminate high fees and offer “sophisticated investment management and advice” as one of the popular websites claims.  For someone who doesn’t want to work with a human advisor and who doesn’t have the knowledge or time to research investments, these services can offer value over opening an online brokerage account and guessing on what to do next.  Besides, haven’t we all heard the horror stories about the guy who stole money from his clients or the broker who lost your friend all of his savings.

I started working with a family member recently since they were working with an advisor (I use the term loosely since he didn’t advise them anything) who since 2010 didn’t earn them anything and in fact lost them money.  This was over a period of time when the economy was rebounding from one of the worst recessions in our history and markets were roaring.  How did he manage to lose money over this period?  I asked myself the same question and my forensic style of accounting turned up mutual fund churning and horrible oil and gas investments amongst other poor choices.  Statements only went back a few years but a pattern of ineptitude and wrongdoing emerged rather quickly.  This family member is 84 years old and was invested in mostly all stocks, one of the largest being a speculative solar company.  Thankfully, they will no longer fall prey to this individual and his inept advice.

But this example is a good reason why people are wary of working with a human advisor and why the rise of the machine advisor has been so well received (amongst other reasons such as low fees and the promise of sophisticated investment strategies).

Companies like Betterment or Wealthfront provide investors with an automated investment program consisting of approximately 7-10 different portfolios that they recommend depending on how you answer their risk questionnaires.  They have portfolios for IRA’s and after tax accounts since they need to be managed differently (tax free muni bonds don’t belong in an IRA). These services offer significant value versus the old model of opening an account with an online brokerage firm and then figuring things out for yourself, often with bad results. These firms have sleek interfaces and have raised substantial amounts of venture and private equity capital.

For someone with a small account balance that doesn’t want or value interactions with a human wealth management professional, these services could be a good fit. Also, most wealth managers won’t work with clients who have small balances since they don’t view it a productive use of their time so this fills an important void left in the market.

For wealthier investors, I believe it offers less value for a variety of reasons.  Both Machine Advisors I used created incredibly aggressive portfolios even when I provided answers that I was conservative or moderate.  According to one machine advisor, my moderate portfolio consisted of 90% stocks/10% bonds.  To me, this is aggressive and nowhere near moderate.  On another machine advisor, I ranked 3/10 on risk which only provided me with 41% bonds.  The result of this is that many investors may be taking more risk than they realize and may not realize this until there’s a significant market correction which could cause people to change their portfolios to even a more conservative one at potentially the worst time.

While machine advisors provide some benefits as described above, they don’t offer comprehensive guidance in the form of retirement planning, estate planning, insurance analysis, etc. which wealthy investors want according to almost any poll I’ve ever read.  They also want tailored guidance to their unique situations and do not want to be lumped into a bucket because only 6 or 7 exist.  Why would I wear a normal fit shirt when the tailored fit looks and feels much better on me?  They want advice and guidance for their own individual situation and want to work with someone they can trust; not a computer program which assumes what’s appropriate for them after answering a few questions.   Besides, peoples view of risk change and can change often depending on what’s going on in their lives.

People in the wealth management industry seem to be very scared of the machine advisors and I’m still not sure why.  Perhaps it’s because they aren’t actually adding any value to their clients and they’re scared shitless that one of the relentless ads being shown for these machine advisors will catch their attention and they’ll wonder why they’ve been paying 1% for a portfolio of high cost funds that don’t actually beat the market.  In that case, I completely understand.  For me, I see technology I’ll one day be able to leverage which will make the job of portfolio management easier and allow me to spend more time in front of clients making sure we’re adding value in every way possible.


Jared Toren
Proper Wealth Management, CEO & Founder



Proper Wealth Management’s blog is not an offering for any investment. It represents only the opinions of Jared Toren. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest. Jared Toren is the CEO of Proper Wealth Management, LLC, a Texas based Registered Investment Advisor.   All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. 





Author: Jared Toren