Screen Savers: Will Online Financial Planning Catch On?With the "flash crash" seared into investors' minds, would they trust a financial planner who climbs out of a computer?
New online financial-planning services, led by a Philadelphia-based startup called Veritat Advisors, aim to replace the traditional in-person approach with a faster, cheaper beam-me-into-your-living-room model.
Here, you feed details about your income and net worth into a secure website. Aided by advanced software, an adviser then generates a comprehensive financial plan and investment recommendations, followed by live video chats.
Cheap, trustworthy advice is in desperately short supply. The economist Robert Shiller of Yale University has estimated that roughly 50 million Americans with no access to professional advice could benefit from it.
But the typical financial adviser can serve only about 70 to 90 clients at a time, reckons Mark Tibergien, managing director of Pershing Advisor Solutions. It would thus take well over 550,000 advisers to cater to the needs of everyone who needs help with saving, borrowing, investing, retirement, taxes and estate planning.
There are 62,000 certified financial planners in the U.S., according to the CFP Board of Standards. They often charge upward of $150 an hour for a consultation and $3,500 for a comprehensive financial plan—rates that scare off many potential clients.
But if financial planning could be moved online and automated at low cost and high speed, the game might change. Tom Mooney, a certified financial planner at Veritat, thinks he could serve as many as 1,000 clients a year thanks to automation. (The service, which goes live this month, has only a few dozen clients so far.)
Of course, when computer models go awry, they can contribute to monster-size problems, like the flash crash or the flawed assumptions that helped precipitate the financial crisis.
Veritat's brain trust certainly seems impressive enough. Its president is Kent Smetters, a risk-management professor at the University of Pennsylvania's Wharton School who also teaches applied mathematics and computer science. Veritat's software draws on academic research to solve common problems in financial planning, such as when to spend and when to save for retirement, how to adjust stocks and bonds in a portfolio, and how to determine insurance needs.
Veritat's backers include Andrew Rudd, co-founder of the financial-information firm Barra, and Arnold Wood, head of Boston money manager Martingale Asset Management. Mr. Smetters says the firm has so far secured about $1.25 million in funding.
"The problem with traditional financial planning is that it's a labor-intensive human resource that's very high cost," Mr. Smetters says. "But most people actually want to talk to somebody about their financial plan."
Veritat charges a $250 upfront planning fee, plus $40 a month. That includes three initial consultations and quarterly and annual reviews, all conducted via online video chat.
A similar service, People's Financial Advisor, charges $99 for a computer-generated financial plan and $99 for each telephone consultation with a human adviser.
Neither firm charges commissions. Both favor index funds, rather than the pricier investments often pushed by brokers and financial planners.
All this makes sense, but will it work? "A number of folks have chased this dream of online advice," says Bill Doyle, an analyst at Forrester Research. "It's likely that more will fail before someone actually succeeds."
Adam Apt, a financial adviser in Cambridge, Mass., who has worked at two firms that sought to provide computerized financial advice online, warns that the strength of the idea also is its weakness. "Who is most likely to go for automated investment advice?" he asks. "People who don't have a lot of assets outside a retirement plan." That makes it difficult for the advisory firm to earn adequate income from money-management fees.
Robert Schumann of People's Financial Advisor says that in three years his online firm has sold only "a couple of hundred" financial plans.
He says a bank bought a plan for each of its roughly 200 workers. "But only about 25% of them actually used it," he says, "even though they didn't have to pay anything for it."
One obstacle, says Mr. Schumann: Many people feel financial planning is worthwhile only for the wealthy. Others are suspicious that there must be a catch hidden behind the low cost.
So far, says Mr. Doyle of Forrester Research, "the lack of a well-integrated human touch" has been the undoing of most attempts at online financial planning. He says he thinks Veritat's blend of automation and personalization might have wide appeal. If he is right, the middle class might finally stand a decent chance of getting upper-class advice.
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