I talk about Robo Advisor firms a fair bit on here, I had planned on moving on so you guys don’t think I’m a one trick pony. I was doing a good job of that until one of the ‘Growth’ team over at WealthFront decided to jump into my conversation on Twitter with a Fee only planner to call it ‘uninformed speculation’. While I do love a passionate employee, it’s pretty annoying to have people butt in like that. So, why is WealthFront the worst for me? It’s just my uninformed speculation that they have the best growth team, and the company can’t keep up.
The problem that is facing Robo Advisors is that they are using technology to leverage human capital. Wait! I don’t need you to tell me about the next great algorithm they have created (or its Tax Loss Harvest limitation and conceptual flaws…) I need you to stop for a minute and relax Growth Team. You see, Silicon Valley Tech runs on metrics. Metrics like, return of VC money, metrics like AUM figures, new customer acquisition etc. These growth guys are what make a company succeed, and afford them next round funding, and steer them towards profitable IPOs. But what happens when your support team can’t keep up with your growth team?
The bubble that is facing Robo Advisor firms is that by leveraging savvy marketing practices they are acquiring massive amounts of market share, but they cannot keep up with the customer base. Just like investing itself, everyone is a genius in a Bull Market, but what happens when business cycles inevitably shift, and investments start losing money?
I can’t even begin to idly speculate what their knowledge ratio is, by which I mean how many people at WealthFront have the skills to connect with fleeing customers. If you are an investor suffering the emotional pressures of losing in a bear market, you need a strong, experienced and confident guide to support you during this time. Without that expertise people sell low due to fear, and cripple their financial plans. This is where the marketing for Robo Advisors falls down. They offer a discounted AUM fee but really all they are doing with their product is offering a tailored fund of funds. Without guidance people will sell, and when that happens not only will will the customers suffer, but the bubble will burst, and all that hard work to acquire new business will be for naught.
Call it uninformed speculation if you will, but why not test it out? Call up Wealthfront, or your robo advisor of choice, and ask them to explain something about the program. Perhaps express your interest in Tax Loss Harvesting alongside your 401k payments. See if they can explain the wash sale risks. Personally, I emailed WealthFront I got no reply. When I called WealthFront I spoke with someone who didn’t know what I meant and recommended reading the website and linking all my accounts. If that is the level of support in the good times, then they aren’t ready for the bad.
As I said last night on twitter, there is nothing more dangerous to a firm than having weak foundations and too much leverage. In the case of WealthFront, it seems to me that they have a killer tech team, an outstanding growth team, and an educated and savvy investment team. All the right pieces to build a huge company fast. I’m looking forward to seeing how that massively leveraged mix of experience is going to be able to quell the tide when things don’t go to plan. Is everyone going to get a call from Burton Malkiel their CIO? Or are they going to get a call from someone who doesn’t know their arse from their elbow? Or maybe, they won’t get a call at all, and instead you’ll get a nice rich text email saying ‘don’t panic!’
Lots of good ideas and good people out there, but there is a real bubble growing, and if these Robo Advisors don’t start focusing on training up the grass roots support teams, they are not going to be able to handle the exodus when the markets stop shining their light on them. Oh, and Growth Team… stop butting into my conversations.