Why mutual fund companies are jumping on the DIY craze

Charles Schwab & Co. is rolling out its new "robo-advisor" service this quarter, signaling a major change in the market for investment services. The brokerage is betting that more individual investors are pursuing a modified do-it-yourself approach, tapping an array of increasingly sophisticated online tools and a la carte services to boost their ROI.

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The company is describing Intelligent Portfolios as a "personal investing algorithm," according to the company's website. The online platform will ask customers a series of questions about their assets, financial goals and tolerances for risk and, based on the answers, will generate a diversified portfolio of exchange-traded funds customized for each investor. The service will have no asset-level minimums and will be free, with Schwab generating revenue solely on the management of ETFs in the portfolio.

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"It's basically an automated portfolio-management system," said Sophie Schmitt, a senior analyst at financial services consultant Aite Group. "They announced it last year and have rushed to bring it to market."

Do-it-yourself investors have had the products, tools and research to handle their own investments for more than a decade. However, Schwab and other big investment companies, including Vanguard Group and Fidelity Investments, are betting that a lot of DIYers want more help constructing investment portfolios and allocating assets.

"Self-directed investing used to be the only option for those who couldn't afford a financial advisor," said Schmitt. "Now every firm is evaluating the mix of service and technology that clients want."

The evaluation is being motivated by the rise of the robo-advisors—websites that generate automated financial advice and investment recommendations based on online client questionnaires. The scrappy venture capital-backed outfits are still a tiny part of the investment market, but their success in attracting assets and young investors has gotten the attention of larger investment companies.


Exponential growth

As a group, the robo-advisors now manage about $19 billion in assets: a drop in the bucket compared to the trillions in assets managed by heavyweights like Vanguard, Fidelity and Schwab. It is, however, about twice as much as the start-up firms were managing just nine months ago, according to research by consulting firm Corporate Insight.

Schwab isn't the only big player aiming downmarket with advisory services. Vanguard has also entered the fray with the Vanguard Personal Advisor Service it introduced last year. The service, unlike Schwab and most of the robo-advisor offerings, has access to a certified financial planner at its core. Clients sign up for the service online but work with an advisor to draft a financial plan, build a portfolio and manage it. It has a cost of just 30 basis points—about a quarter of the typical fee for a financial advisor, along with management fees on the underlying investments.

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"We're focused on making financial advice more cost-effective for more people," said Maria Bruno, a senior analyst in the investment strategy group at Vanguard. The company currently has a minimum asset level of $100,000 for the new service but is reportedly looking to lower it to $50,000.

A major advantage of Vanguard's offering is that advisors can help with financial-planning goals like buying a house, sending kids to college or planning for retirement. "People who understand the subject matter can invest on their own, but the question is whether they want to," said Bruno. "Tools and calculators are useful, but they're not a replacement for a good financial plan."

Getting a toehold in the market

Fidelity, another giant in the investment landscape, has taken a different tack in the market. Last year it struck deals with two robo-advisors—Betterment and LearnVest—to make the digital platforms available to clients of financial advisors who use Fidelity as a custodian for client assets. The idea is that people who don't meet the advisor's asset minimums can use one of the digital advice platforms and possibly become a client later in life.

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Fidelity does offer advised relationships. The Fidelity Portfolio Advisory Service has a $50,000 asset minimum and charges between 63 and 170 basis points, depending on the underlying investments. The company's impressive website offers reams of free research and investing and planning tools, and Fidelity offers a wide range of service options for customers, said John Sweeney, executive vice president of retirement investing strategies at Fidelity. "Some people want simple solutions; others want more control," said Sweeney. "We have a spectrum of solutions from free to fee that appeal to different investors at different stages of their lives."

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Fidelity has yet to launch its own low-cost, automated advisory service, but there's a good chance it will down the road if the robo-advisors continue to gather assets.

"The focus in the market now is on getting help for do-it-yourself investors who don't want to do it all themselves," said Schmitt.

Robo-advisors Assets April 2014 July 2014 Dec. 2014
Assets under management $2.6 billion $3.7 billion $5.1 billion
Assets advised $8.9 billion $12.0 billion $13.9 billion
Total assets managed $11.5 billion $15.7 billion $19 billion

Source: Corporate Insight
Note: Assets advised includes all investors who have an account with a robo-advisor platform and have used the sites for investment advice, but may not actually give their assets to the robo-advisor to manage in the sites' custom portfolios (assets under management).