For years now, entrepreneurs have been racing to solve the same problem: the financial services industry's persistent inability to provide personalized advice and appropriate investments at a reasonable price to customers who are not rich.
They are confronting a problem with a basic business model that has plagued the financial advice industry for decades. Helping people sort through their investments, budgets, employee benefits, taxes, estate planning and insurance takes time. No two clients are exactly alike.
If advisers earn their compensation through commissions from investment or insurance companies, then they're likely to favor those funds and policies. This often isn't in the best interest of the customers, most of whom ought to be in low-cost index funds. And the better index funds and similar investments tend to come from companies that don't pay commissions.
Customers can pay advisers directly, and many do pay them 1 percent each year of the money under management. But a large number of the best advisers won't get out of bed for less than $5,000 or $10,000 annually (drawn from a $500,000 or $1,000,000 portfolio), given the amount of time and resources it takes to do right by a client. Some others charge by the hour and still agree to work in a client's best interest, but plenty of customers dislike being on the clock.
It was easy at first for established players to dismiss companies like Betterment, Wealthfront and LearnVest as robo-advisers, niche services or certain failures. But recent developments suggest that those new players may be on to something.
Betterment, which builds and manages investment portfolios of index and exchange-traded funds, realized that 20 percent of its assets were from customers over the age of 50. They were asking for advice on withdrawing their retirement money, and the company is now introducing a service to assist them.
The index fund giant Vanguard is now piloting an offering of its own that nearly matches the new players on price while offering unlimited financial planning along with investment management. That's something that most of the new "we'll run your money for you" companies don't offer.
Vanguard's full-service offering, called Personal Advisor Services, costs 0.3 percent annually of the assets it's managing. For now, customers need $100,000 in accounts there to join, but the company plans to drop the minimum to $50,000 at some point soon.