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Roboadvisors stand at the vanguard of human-machine collaboration

Clint Boulton | March 28, 2016
The Vanguard Group's roboadvisor service blends algorithms and human financial advisors to help people manage their financial assets.

While some software robots learn by inference, their improvisational capabilities remain limited. That's where the humans come in. Marcante says the advisor also helps clients

avoid making trading errors during emotional times and volatile markets, often "talking them off the ledge when the markets are down and they're supposed to be holding long-term." Advisors also manage expectations and provide emotional support for anything from a sick parent or a lost job, all things for which algorithms lack finesse -- for today, anyway.

Agile methodology gets down to goals

Marcante's IT team built PAS over the last few years in small chunks using the agile development method, with which Vanguard builds 90 percent of its software. The chief challenge in creating PAS was one of scale, Marcante says. For each client, Vanguard must support separate portfolios aligned to specific goals, including anything from growing the family and home buying to college savings and retirement planning. "The biggest challenge for us was to take what we do at massive portfolios and bring it down to the goal level," Marcante says.

PAS' price point is also appealing, and, according to a case study from Forrester Research analyst Bill Doyle, quite disruptive. Most wealth managers charge a fee of 1 percent of assets under management and often require a minimum of $500,000 to $1 million in assets to invest. PAS costs roughly .30 percent of a client's managed assets and requires a minimum investment of $50,000. "By connecting our proprietary financial engine with the power of people, we're able to deliver massive scale at a very disruptive price, and give clients that piece of mind that comes with a human touch." PAS has generated billions in assets and counts 35,000 clients to date.

Vanguard is joined by Charles Schwab, Wealthfront and in the nascent but rapidly growing roboadvisor market, which will get larger as Fidelity, Wells Fargo Advisors, Morgan Stanley and Bank of America introduce competing products. According to Gartner analyst Chuck Thomas, roboadvisors have collected between $12 billion and $200 billion in assets under management through 2015. He forecasts that via roboadvisors that number will grow to somewhere between $255 billion in 2020 and $7 trillion in 2025.

 

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