Two, almost three, years ago when I was writing my book Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere I noted the potential for algorithmic investment management to ease the burden on many investors. I wrote:

Of late we have seen some tentative steps taken to provide investors with algorithmic investment services. This represents a natural evolution for the investment business because much of the everyday work inherent in investing can be done algorithmically. And it represents another way in which algorithms have become a part of our lives, oftentimes without our knowledge. More sophisticated, automated investment plans will make life easier for a wide swath of American investors who would be happy to take routine, everyday investment decisions off their plate. Automation or not, investors need to educate themselves along the way. It will allow us to spend more time thinking about the bigger, more impactful questions surrounding money.

Subsequently I have written about the rising challenge of robo-advisors and asked a panel of bloggers this past summer about what impact they might have on the business. 2014 has seen an acceleration in not only the number of providers but also the range of services they provide as well. Two of the bloggers, frequently featured on Abnormal Returns, Barry Ritholtz and Joshua Brown of Ritholtz Wealth Management, are now in the so-called “robo-advisor” space as of this week. Their firm launched a service, Liftoff, that is focused on providing their planning and portfolio management services to the average investor.

You can read more about Liftoff in this press release and in some posts as well at Business Insider, Investment News and Wealth Management. Now that the Liftoff service is live I had a chance to dash off some questions for Joshua Brown to answer which he does below. My questions are in bold. Josh’s answers follow.

Automated investment management solutions have really only come of age since the financial crisis. Therefore investors in these programs have really only experienced up markets. One of the main advantages of having a financial advisor is to “hold your hand” through the dark days. How are you guys planning to do that virtually when the inevitable bear market hits?

A couple of truths you won’t hear anywhere else: Hand-holding doesn’t work if someone is determined to obsess over volatility and paper drawdowns. You can only do so much, the rest is up to the person whose money it is. We do a lot of hard work with education and affirmations at our regular practice, but we can’t rewire people’s brains. There will always be a percentage of people who sell out of their retirement portfolios for the wrong reason. We hope that the characteristics of this service the portfolio itself will minimize that. We can’t prevent it entirely nor can anyone else.

Dave Nadig in this piece at talks about the (positive) role Google could play as it enters the financial technology space. He talks about the role a big company like Google could play in educating consumers. If the plan is to manage people’s money over the lifecycle is there an educational component in what you are doing?

We could literally take this anywhere, in any direction. I can’t tell you we’ve got any specific plans at the current moment for education. I feel like Barry and I, and now our lieutenants Michael and Kris, are already doing plenty of that kind of thing informally. We started this service in reaction to readers asking for our help but not qualifying for full-blown financial planning and personalized advice. This includes, by the way, some of the young adult children of our regular clientele. We were tired of sending them out in the hinterland to fend for themselves. I wrote a book about the horror show that awaits the uninformed investor. We built Liftoff as an answer.

Having looked at the major robo-advisors there does not seem to be a whole lot of differences in how they actually manage portfolios. RWM is “white labeling” an automated investment management solution from Upside. What kind of customization can you do to differentiate yourself from the existing competition and those that will soon be using the same platform?

We’ve white labeled the technology but the portfolios are ours, Liftoff is comprised of proprietary models that we’ve created and that we manage on an ongoing basis. I would also say that there is more difference between different automated advisories and their portfolios than might be currently understood. Some of these differences are just marketing spin but some are fundamental.

One of the big selling points from financial advisors is that they can “customize” a portfolio solution for you. In some cases that is clearly important, but I have written that about how “you are not that unique an investor.” Do automated solutions, like Liftoff, implicitly expose the falsity of that hand-crafted portfolio model?

No. Here’s the reality, and this will only partially answer your question but it’s important: Older, wealthier people should have a component of their portfolio that is tactical or, shall we say, risk-aware. Younger, aspirant people should not, or rather, need not have that. This is the major difference and I know it for a fact. I’ve been in meetings and on phone calls with thousands of investors – you’re going to have to take my word for it. The tactical or risk-aware component is so important because it will allow a client to mentally and, in some cases, physically get through vicious drawdown periods without freaking out and selling everything at the bottom. This “holding hands” bullshit is not going to cut it, but it will help. Discipline can best be achieved when there is an open vent somewhere for the steam-heat of the moment to escape from.

Here’s why this is important – a young person who is going to be accumulating assets for the next thirty-plus years doesn’t lie awake at night dreading market sell-offs or volatility. They can accept drawdowns because they have their whole lives to keep earning. With our service, they are continually ADDING money to their investment portfolio on a monthly basis, so sell-offs are actually a net positive for them. This is the perfect client for automated, low-touch, simplified advice.

The traditional wealth management customer, however, benefits greatly from having a trusted advisor whom they can count on and can go to with concerns and questions. This customer does fear large losses of value and market crashes – and this fear is quite rational, I might add. When you’re wealthier and older, you have more to lose and less time to make it back. You have a higher cost of living and much more complication in your life – dependents, debts, estate issues, health problems etc. I do not believe an automated solution will ever replace the need for personalized, customized advice and a great human relationship for this client. The technology is helping us serve this client better and more efficiently, it is not becoming the service itself.

As Michael Kitces at Nerd’s Eye View has noted a ton of capital has rushed into the robo-advisor space. Any thoughts on how this all plays out? Do we end up with a few big players or do we see a bunch of different models succeed?

I have to say that I don’t look at what we’ve built as being “in the robo-space” even though I accept the fact that it’ll get lumped in. The media sees this as some kind of robo-war between Schwab and Fidelity and advisors and on and on, but the truth is, it’s a gigantic world with almost $100 trillion in wealth that needs managing, nobody is getting most of it. I think it’s a lot more interesting to think about what Liftoff could do for the kinds of customers who end up at wirehouse call-centers or second-tier brokerage firms simply because no one is interested in helping them in a conflict-free way. We are.

The truth is, I absolutely love what Adam Nash and Andy Rachleff have built at Wealthfront, we like those guys a lot and respect the hell out of them. Bill Harris at Personal Capital is a friend and is brilliant as well, the guy was in the PayPal Mafia with Elon Musk and Chad Hurley! We love what they’re all doing but we don’t compete with them. Barry and I are not Type A personalities, we’re not super-competitive people and we’re not trying to win anything. I don’t have any VCs to answer to so I have no problem admitting that I have don’t know how big or small a deal Liftoff will end up being for us – all I know is, it’s going to help the people who use it. That’s our priority. Upside helped us bring our Liftoff product to market and we’ll see where it goes. We’re not in the market-share hunt, we’re in the business of giving great advice and managing money.

Sometimes I think we, the blogosphere and by extension the financial media, don’t acknowledge the enormity of the changes that have occurred in investing in the past decade. We are now in the world where asset classes, via ETFs, are virtually free. Now investment management is available at a nominal fee as well. Where does this trend end?

I remember in the year 2001 when a representative from the American Stock Exchange came to our branch to explain SPY to the brokers, which it had recently listed and was trying to find an audience for. It seems like yesterday. You’re right, the pace of innovation sneaks up on you, but when you give it some thought, it’s breathtaking – especially when you consider the “stodgy” image that finance has attached to it for some reason!

Thanks to Josh for his responses and good luck with Liftoff.

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