Who Uses an Online Financial Advisor?
Paladin Research has identified five types of investors who are most likely to use the services of an Online Financial Advisor (OFA). An OFA is a financial advisory firm that uses computer programs to invest assets in Exchange Traded Funds. All of the OFAs marketing, client servicing, and reporting is online. A few OFAs allow investors to talk to a live financial planner, financial advisor, or client service person.
A Bad Experience
The first type of investor has had a bad experience with a live financial advisor. There is a good chance they selected the wrong advisor, but they no longer trust advisors to help them achieve their financial goals. They have two choices. They can invest on their own or use the services of an Online Financial Advisor.
Beat the Market
Some investors do not believe financial advisors, who provide active management services, produce superior investment returns compared to returns that are produced by the market (index funds). Superior returns are also called “beat the market” returns. One alternative is passive investment services that are provided by OFAs that invest in index funds and ETFs.
Investment Expenses
Additional investors have become very sensitive to the total amount of layered fees that are deducted from their investment accounts. They do not believe they have received adequate value in relation to the fees that they are paying. They measure adequate value based on performance, risk management, and personal services (meetings, reports).
Small Accounts
The best financial advisors, who work for fees, do not want to work with investors who have smaller asset amounts. They cannot cover their costs. For example, an advisor who charges a 1% fee makes $500 on a $50,000 portfolio. He cannot deliver advice and ongoing services for $500.
Many of the best advisors in America have minimum asset requirements that can be several hundred thousand dollars or millions of dollars. Investors with smaller asset amounts end-up with salesmen who sell investment products for commission. Over 92% of investors have told Paladin they do not want salesmen investing their assets. An Online Financial Advisor may be their best alternative.
Generation Y and X
Like investors with larger asset amounts, most baby boomers and current retirees are more comfortable with financial advisors they can meet with face-to-face. They are less comfortable letting black boxes (computer programs) manage their assets. And, in case the market takes a big nose-dive, they want someone they can talk to.
On the other hand, their children and grandchildren grew up with technology and services that are delivered over the Internet. They are more comfortable letting algorithms manage their assets. Younger investors with smaller asset amounts may be the Online Financial Advisors biggest potential market.
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