Bank of America Corp.’s “thundering herd” of Merrill Lynch financial advisers is about to be joined by a robot.
The firm has put dozens of employees to work on an automated investment prototype for Merrill Edge, which targets accounts under $250,000, according to two people with knowledge of the project. Bank of America intends to unveil the service next year, said the people, who asked not to be identified speaking about company plans.
Banks view robo-advisers, which use algorithms to provide investment advice online and with little or no human contact, as a disruptive technology that can help attract younger investors before they get hooked on a competitor’s platform. Executives at Morgan Stanley, which owns the U.S. brokerage with the most human advisers, and Wells Fargo & Co. have recently said they would develop or acquire a robo-adviser.
“That is a real threat to our business, because we are disproportionately full-service, high-value-added, person-to- person activity, which isn’t for everybody,” John Shrewsberry, Wells Fargo’s chief financial officer, said in June. “There’s generations of tomorrow’s investors coming up today who may be more attracted to something less person-to-person and more technologically enabled.”
Bank of America sees an opportunity “for a robo-advised offering that could complement the advice and guidance offered by our financial solutions advisers,” said Anne Pace, a company spokeswoman.
Betterment, Wealthfront
Startups that popularized robo-advice include Betterment LLC, which launched in 2010 at a TechCrunch Disrupt conference in New York, and Silicon Valley-based Wealthfront Inc. Users, who tend to be high earners under the age of 50, provide their risk tolerance, age, income and goals online or through a mobile app. Algorithms suggest investments, usually in a basket of low- cost exchange-traded funds, and regularly rebalance the portfolio and realize losses for the sake of tax efficiency.
Without human advisers -- people are the biggest expense at any securities firm -- the new ventures can charge annual fees of 0.5 percent of assets under management or less. That undercuts full-service brokers, which typically charge annual fees of at least 1 percent. On a $100,000 investment, the difference could mean more than $50,000 in savings over 20 years, given the same annual returns. The gap can widen further because the ETFs used by robo-advisers are cheaper than most mutual funds sold by humans.
“The difference in cost to the consumer is so significant that it can’t be ignored,” Bob Hedges, a partner at consulting firm A.T. Kearney, said in an interview.
The industry has seen dramatic growth, from almost zero in 2012 to a projected $300 billion in assets under management at the end of next year, according to a June report from A.T. Kearney. This year alone, Betterment almost tripled its assets to $3 billion. Robo-advisers could manage $2.2 trillion by 2020, the report said.