Automation Takes Aim at Financial Advisers-and Their Fees
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This is Your Money Matters from The Wall Street Journal.
Hi, I'm Tanya Bustos reporting from the newsroom in New York. So automation has taken aim at the traditional advisory business and their fees. Lately, services use algorithms to generate investment advice, and they can deliver it online, charge low fees, and it's really pressuring the traditional advisory business. Let's get a little bit more on the current state of affairs. Joining us now in studio is The Wall Street Journal's Anne Tergesen. Welcome. Thanks for having me. So Anne, automation is threatening a lot of industries, a lot of businesses. Now we're finding that it's even threatening the most personal business, personal finance, particularly the business of advice.
How did robo-advisors first bring automation into financial advice?
How has automation been making its way into the personal finance world over the years?
Sure. So automation started to make its way into the advice business right about 2009, 2010, when a bunch of their so-called robo-advisors launched. And these were, at the outset, largely independent startup companies that had a whole different way of providing financial advice, which was really to use computers and algorithms to to gather data about their customers and then to kind of spit out these recommendations and investment portfolios for them. And since then, what's happened over the last like two years in particular is that a lot of the large financial services companies, including names like Vanguard and Schwab, have adopted in whole or in part automation in these new ventures that they're launching to provide financial advice to clients for much less, much lower fees.
So when you look at a financial firm that counts on advice as a source of profits, there's a lot of implications there for business.
How heavily has business been impacted? Right. So it's very hard to measure because the financial advice industry is very diffuse and dispersed and varied. And so it kind of ranges from the solo operation where it's just one man or one woman in an office downtown to to, you know, these very large companies like Vanguard launching this advisory service or, you know, companies like Morgan Stanley and Merrill Lynch. So it's hard to measure the impact, but it is clear that a lot of these firms are feeling the need to respond. You know, a lot of the bigger companies, the Merrill Lynch's, the Morgan Stanley's, are launching automated divisions themselves in an effort to sort of – everybody's sort of looking to keep younger – to retain the younger people, people who they used to say, go away, come back in 10 years when you have some money, and then we'll talk then.
Well, now they don't want to do that. They want to serve them with automation. And that is really pressuring prices. Right, right.
Which big financial firms have adopted automated advisory services and why?
And the demand for advice is still alive and well, right? Clients are still looking for advice. Has the shift changed as of late? Are people more inclined to just ask for financial advice or look for financial advice lately?
Right. So it's really been growing. If you think back to the late 90s during the bull market, there was all this enthusiasm for do-it-yourself investing. And there was this whole idea that the market would go up 15%, 20% a year that it was like shooting fish in a barrel. You didn't need to pay an expert. All you needed to do was buy a couple tech stocks and you would make yourself a millionaire. Right. So at that point, there really wasn't a lot of demand for advice. But since the tech stock bubble burst in 2000, and then in particular since 2008, people really have been feeling that they need help. They want help. They're no longer comfortable kind of going it alone in the market. And then on top of that, you've got this huge wave of baby boomer retirements.
Mm-hmm. And, you know, as people get close to retirement and as they retire, they really feel like they've come up against a huge set of complexities in trying to make these, you know, 401k type assets last. You know, it used to be that people had pensions and they were given monthly income.
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