Some of the most successful fintech-startup disruptors have been the so-called robo-advisers: providers of apps that give consumers automated investment help.
The leaders in this market, including Wealthfront, Betterment and FutureAdvisor, have attracted large amounts of venture capital and a great deal of media buzz, and they are on a path to capturing sizable market share (more on that later).
So it made perfect sense when BBVA Compass Bancshares in Houston announced a partnership with FutureAdvisor on Tuesday. As banks seek to compete with — and borrow some of the best ideas of — fintech startups, more are bound to partner with robo firms or create their own automated investment-advice software.
The $89 billion-asset BBVA Compass has been buying fintech startups such as the digital bank Simple and the digital design firm Spring Studio in its effort to become a leading technology innovator. In April it also became the first U.S. regional bank to partner with Dwolla and offer real-time payments.
"Technology is changing the way people invest, say for retirement — we see it from highly engaged, self-directed investors, all the way to passive investors with limited investment acumen," said Jorge Moller, director of the retail digital segment at BBVA Compass.
BBVA Compass wanted to offer an app that would provide quick access to investment-account information to help customers make better decisions, let them easily manage their accounts — such as old, abandoned 401(k)s — and save time and effort for the customers and the bank. It was aiming mainly for a specific set of customers: tech-savvy, passive investors.
"Passive investors often have what I call 'orphaned' retirement accounts – they worked at a company and then they left that company, their 401(k) just stays there, [and] then they start another one," Moller said. "And they don't touch it."
Why did BBVA Compass choose FutureAdvisor rather than, say, Betterment, Wealthfront or one of the many other robo-advisers?
"One key piece is we thought they were doing a good job at communicating with customers," Moller said. The app sends text or email notifications, for instance, every time there's a change on an account.
"The individual emails and mobile push notifications the clients get are all personalized by the algorithms and applied to particular situations," said Bo Lu, FutureAdvisor's chief executive.
Lu's company, which was acquired by the asset management firm BlackRock in September and manages $700 million in client assets, has built about 80% of what a good financial adviser will tell his clients over the course of a year into its software, he said. For instance, the software has a general framework for communicating about orphaned 401(k)s, yet the algorithm provides a different, detailed set of recommended steps for each client.
FutureAdvisor's algorithms apply modern portfolio theory to customers' account data. Account aggregation is handled through Yodlee (which is now owned by Envestnet). Lu said the company does no screen scraping, a type of account aggregation that has been under attack recently.
BBVA Compass plans to build the FutureAdvisor software into all its digital channels and to begin rolling it out sometime this year. For customers who want more advice, a premium version of FutureAdvisor that comes with human investment guidance will be offered for 50 basis points.
I downloaded the FutureAdvisor app on Monday to try it. Account setup was quick, and I was able to link one of my investment accounts , an orphaned 401(k), within about five minutes. The app also asked me a few basic questions: my age (rapidly advancing), my intended retirement age (the 12th of never? sometime before death?), my investment style (low risk/conservative).
The app immediately generated a report card of sorts. It told me I was following six out of nine best practices. This made me feel good, because I haven't touched this account in a long time and never put any real thought into it.
My investing errors, identified by the app with X's in red circles: my portfolio is not well diversified (no surprise there), I have idle cash that should be invested, and I should be saving on taxes by using an employer-sponsored plan (this one isn't true, I do use my employer's plan, but I haven't told FutureAdvisor that yet).
The app generated a specific list of recommended trades. Most of these involve selling stocks and buying exchange-traded funds. A line at the bottom of each page says, "Let us do the work to help get you to your best path." This links to FutureAdvisor Premium, the human-assisted advisory service.
Am I going to drop everything and follow FutureAdvisor's recommendations? Probably not. I think ETFs are generally a good idea, but I would want to research these specific funds before putting so much money into them. And due to sheer laziness and lack of time, I may not get around to that for a while. Maybe I'm even more passive than the demographic BBVA Compass is trying to reach.