With financial advisors swarming to a hybrid approach of technology and human investment advice, one hold-out believes that all-digital advice is best.
Wealthfront Is on Its Own
Wealthfront is forgoing the trend of adding financial advisors to digital offerings.
Wealthfront is currently the only company that exclusively offers an all-digital financial advisor. Ellevest provides financial and career advisors, while Betterment has both ongoing and a la carte financial advice packages that can be used in conjunction with its digital offering. New to the U.S., Wealthsimple provides financial advisors to all of its clients, as does Vanguard, SigFig and TD Ameritrade (NASDAQ:AMTD). Meanwhile, Personal Capital promises certified financial planners for all its paid clients.
So can Wealthfront’s Path compete?
Wealthfront’s Path Is an All-Digital Financial Advisor
Wealthfront believes that the current financial advisory model is obsolete and wants to circumvent in-person meetings, video chats and phone calls by offering an on-demand, digital financial planner. The company’s blog explains that, “We built Path so you can jump in no matter where you are to see how different decisions could impact your financial future.”
Path’s questionnaire is distinct from the typical robo-advisor “risk questionnaire” of five to ten questions. In fact, the Path interview questions mirror those that a human financial planner might ask. Path is looking to exploit younger people’s preference for digital interactions over vocal conversations. Think about it: how many times do 30-somethings call people on the phone, versus the number of times they send texts?
The platform begins predictably by asking about your investment goals: savings, retirement, college or other. But then Path asks, “What are you looking for in a financial advisor?” So almost from the beginning, Wealthfront deviates from the typical robo-advisor questionnaire and brands itself as a true “financial advisor.”
The response options include; I’d like to create a diversified investment portfolio, I’d like to save money on my taxes, I’d like someone to completely manage my investments so that I don’t have to, and/or I’d like to match or beat the performance of the markets.
Then investors are asked about their ages, incomes, and tax bracket details. A human financial advisor would ask all of the same questions.
Then come the risk-related questions, which are meant to determine the client’s comfort with losses.
At this point, a tentative investment portfolio is proposed. But the questions continue after the investor signs up for Wealthfront to help the client determine the best type of account for him or her.
Is Wealthfront’s Path a Viable Alternative to a Human Financial Advisor?
Actually, Wealthfront believes that its assumptions might actually be better than those of a human. One of the most difficult components of financial planning is creating future assumptions. An advisor can assume that future stock market returns will equal 9%, since that’s in accord with past returns. Or the advisor might assume that the client will live until 89, since that’s the firm’s benchmark. But Path claims that its assumptions are more reliable.
The Wealthfront Path team uses a team of PhDs to forecast Social Security, inflation and investment returns. Then, the platform integrates the client’s actual behavior to predict the future. More specifically, Path uses investors’ actual transaction histories to determine a rolling 12-month average of saving and spending.
That is more accurate than what a client might say!
So if an investor begins saving less because his or her child is in college now, Path can see that is occurring, based on the data, and incorporates that information into its financial planning advice.
Scenario forecasting is embedded into Path. The platform allows users to adjust their expectations and see how those changes impact their future.
For example, say you get a promotion and a fat raise, so you can save more. You’ll find out, graphically, how greater savings today will impact your long-term goals. And, like a financial planner, Path provides advice about which accounts (including non-Wealthfront ones) to funnel your savings into for the best long-term outcomes.
Can Digital Financial Advice Replace a Human?
Ultimately, the answer is, it depends. If you have a large net worth, along with complicated tax and estate planning issues, then clearly Path isn’t enough for you. For sophisticated mass affluent investors, Personal Capital offers a variety of planning tools, including CFP®s. Or you might use your own independent financial planner.
Yet if you have the typical financial issues of a 30 to 45-year-old, such as raising a family, sending the kids to college, and retirement, along with a steady salary, then Path might be just fine.
Investors today have more financial planning choices than ever, including human financial advisors, a combination of robo-advisors and financial advisors, and a digital financial planner. Wealthfront’s Path digital financial advisor provides an investment management solution that almost anyone can utilize.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Her work has been featured in U.S. News & World Report, Yahoo! Finance, Investopedia, GoBankingRates, TheBalance and more. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros.