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Online Advice Firms Face Difficult Future

An estimated 130 online financial advisory services have launched since the Great Recession — many in the last two years — but these firms are struggling to gain traction and achieve profitability. While they target the emerging wealthy market (investors with $50,000-$250,000), accounts tend to be smaller. And competition is driving prices down, with some predicting consolidation as early pioneers end up face down with arrows in their backs.

Along with competition from established discount brokers like Schwab and TD Ameritrade, banks like BoA and UBS are targeting the emerging wealthy market — not just with technology but with call centers, brand and a big advertising budget. Online firms may be able to do screen scrapping to help investors consolidate accounts and show asset allocation, but fewer than 10% of investors take action based just on advice from online services. In fact, some larger wealth management firms are starting to combine technology into their own practices to serve the emerging market.

LPL has taken a different approach, recently shuttering Netwise, which offered advice to investors with less than $100,000. The firm’s Retirement Partner Group led by Bill Chetney is moving aggressively, with its Worksite Financial project, which combines technology, call centers and advisors to provide transitioning and on-boarding services, customized education and advice.

Getting advice is not like buying books or music online, where the buyer knows the quality of the product or service and the risks are minimal. Even online car dealers failed, although sites that compare pricing, features and quality took off. But retirement and financial planning is a lot more important than books, music or cars. Most people, even the emerging wealthy (and perhaps especially those people because they are less sophisticated) will probably still turn to advisors — either in-person or on the phone.

Plan advisors have a huge advantage, with access to tens of thousands of investors in their plans where they are paid to establish trust and a personal bond. But leveraging that can be difficult without state-of-the-art technology and complementary call centers.

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