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Three simple but fatal defects in Andy Rachleff’s theory of robo-advisors’ ineluctable destiny of domination


By Scott MacKillop | February 28, 2017

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Robos no doubt are tireless machines that perform tasks like tax-loss harvesting at a higher frequency than RIAs. But at what cost?

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Brooke’s Note: Last week we covered Wealthfront CEO Andy Rachleff calling the human advisor vs. robo contest in favor of the ‘bots — a proclamation that coincided with the Silicon Valley firm’s rollout of planning software, which, he contends, may leapfrog the field. No less than the skeptical Michael Kitces thought Rachleff’s new software had indeed established a unique positioning. See: Andy Rachleff blasts flesh-and-blood advisors — even planners — as Wealthfront returns to offense in robo game after losing ground under former QB Adam Nash. You debate Rachleff at your own peril. Not only is he an accomplished entrepreneur but he teaches courses on technology entrepreneurship at Stanford Graduate School of Businessmaking him masterful in arguing his point of view. Enter an unfazed Scott MacKillop. Here, using Rachleff’s own top three reasons that FAs have retraining programs in their futures, MacKillop argues a radically differing conclusion. Why? Because in financial planning software’s greatest strengths, he contends, are the seeds of its greatest weaknesses. MacKillop is a lawyer, a 40-year veteran of investments and someone who studied three years at — you guessed it — Stanford. And, yes, his new venture, First Ascent, could be considered a competitor to the robos. (Full disclosure: He had a brief career as an RIABiz reporter and Lisa Shidler is finishing up an article about his new company) Of course, Andy Rachleff, we welcome a response from you, even if you have a few choice words for us to toss into the mix.


Nice try, Andy, but I think financial advisors are safe for now. You haven’t made the case yet that digital advice providers (I understand that you don’t like the term “robo-advisor”) will replace them any time soon.

In fact, after reading your Feb. 22 blog, “Software is better than people,” they should be feeling pretty secure in their jobs.

You say “software is far better at most jobs than people are.” Then you cite Amazon, Uber and Yahoo as examples of the raw, transformative power of software. But my quick Google search reveals that Amazon has over 340,000 employees, Uber more than 1,000 and Yahoo, upward of 9,000. Based on those numbers, it appears that there are still many jobs at which humans excel over software.

Perhaps what you really meant was that software excels at many tasks and can outperform humans by a significant factor at those tasks. In this you are correct. In fact, financial advisors have recognized this for many years and have incorporated technology into their practices to help them do their jobs better and more efficiently. See: Jon Stein unleashes elite RIA referral unit as crown jewel of grand Betterment plan to sell virtual fiduciary advice.

We’re good, thanks

But those advisors don’t confuse the tasks that software performs well with the essence of their jobs, as you apparently have.

You state that “Software does a better job than traditional financial advisors because it provides to an unlimited number of customers important services that had previously been available only to the very wealthy. And the services it provides are even better than what can be delivered manually.” You then provide three examples.

But before we get to your those examples, let’s examine the false dichotomy you establish between performing tasks in an automated way and performing them manually. In case you haven’t been in a financial advisor’s office for a while, they stopped using yellow pads, pencils and adding machines a long time ago.

You can safely assume that every bit of technology that your firm develops, or some reasonable facsimile of it, will be incorporated in advisory practices across the land shortly after you develop it. For that we thank you and the venture capitalists that backed you. And because you are not the only firm developing such technology, the price that advisors pay for it will be quite affordable. Again, thanks for that. See: Mark Tibergien reveals big Pershing robo future as his firm partners with Vanare, SigFig and Jemstep — and follows TD Ameritrade’s open API lead.

Achieving rebalance

Now to the three examples you offer to prove the superiority of robo-advisors — yours in particular — over human advisors.

You hold out Wealthfront’s daily rebalancing as superior to the typical quarterly or semi-annual rebalancing that you attribute to “most advisors.” Your theory assumes that if some rebalancing is good, then a lot must be better.

You may or may not be familiar with the fact that some of the research on rebalancing does not support such an approach.

Like many areas of financial advice, there is no clear best rebalancing strategy. The optimal strategy depends on many factors and even the experts are not in agreement. But based on recent research I have seen it appears that, as a default strategy, less frequent rebalancing—even annually—may produce better results. I’m sure your software can rebalance in myriad ways. After all, that’s what software does well. But who decides what rebalancing strategies to employ and when to employ them? Would an advisor be helpful? See: Orion Advisor Services inks licensing deal to close the rebalancing gap with Tamarac and Black Diamond.

Look busy

Your second example is tax-loss harvesting.

Again, your approach seems to be if a little is good, a lot is better. Wealthfront harvests tax losses on a daily basis, rather than once a year as you suggest most advisors do. With all this rebalancing and tax-loss harvesting going on, you sure are generating a lot of transactions in your client accounts. And you are doing this without any interaction with your clients about their need for, or ability to use, the tax losses you generate. See: Wealthfront’s high-net-worth cat leaps out of the bag — keeping it one robo ‘pivot’ ahead of Schwab

I read the Wealthfront tax-loss harvesting white paper on your site so I know your firm is aware of the detrimental effects that such frequent trading can produce for a client. I also know that your claims about the benefits of your daily rebalancing and tax-loss harvesting strategies are based on backtests and hypothetical data-mining exercises and that you acknowledge they may not actually accrue to your clients in real time.

Wouldn’t it be useful to have a real human, backed up by your awesome number crunching capabilities, talk with the client to see if they would actually have a need for, or benefit from, all this trading and harvesting? See: In wake of high frequency trading hoopla, Fidelity Investments is designing ‘Sakura’ to secure better trades for its ‘shareholders’.

Fiduciary in the house?

Your third example is Wealthfront’s new financial planning software, Path.

The recent RIABiz article that discussed your new software had Michael Kitces loving it and Bill Winterberg unimpressed. Based on what I read in the article and in your blog, Path sounds pretty cool. I think financial advisors would find it very useful and would pay a pretty penny to get their hands on it. See: Andy Rachleff blasts flesh-and-blood advisors — even planners — as Wealthfront returns to offense in robo game after losing ground under former QB Adam Nash

But you make it pretty clear that Path is not a tool for financial advisors. As you say in your blog, “with Path, no interview is required, and you get your plan right away …. Not only are your results immediate, but they are interactive. You can even work with your plan on your mobile phone while you’re waiting for a train or sitting in a coffee shop.”

So let me get this straight. Path is a self-administered program that allows an individual who has no financial background or training to develop their own financial plan while they are riding a train or sipping coffee?

Is there a fiduciary in the house? See: Why robo-advisors meet the lofty fiduciary standard when so few humans can, according to an opinion written by Betterment’s outside counsel.

Don’t worry financial advisors. Your jobs are safe.

Scott MacKillop is CEO of First Ascent Asset Management, a Denver-based firm that provides investment management services to financial advisors and their clients. He is a 40-year veteran of the financial services industry. He can be reached at