Bank of America to Build Its Own Robo Adviser

By Penny Crosman for American Banker

Bank of America’s Merrill Lynch unit is the newest entrant into the robo-advisory game.

It announced plans Monday for an online service and app called Merrill Edge Guided Investing, which like other robo advisers will query customers about their age, income, risk tolerance as well as their investment goals and time horizon. A basket of exchange-traded funds tailored to the answers would then be recommended. It will be billed as a low-cost way of investing modest sums such as funds in old 401(k) accounts.

B of A will offer an online version to clients then to everyone else nationally in the first quarter; iPhone and Android apps would follow later.

“We recognize that not all investors are alike and our clients are all thinking about how, when and where they seek guidance,” said Aron Levine, head of Merrill Edge. “Some like to do it independently, others like to work with an adviser, and others seek some combination of both.”

The robo product, he said, will blend the capability of Merrill Edge’s online brokerage platform with Merrill experts’ wealth management knowledge.

Bank of America is following in the footsteps of Capital One Financial, which rolled out a robo adviser in June, and BBVA Compass Bancshares and U.S. Bancorp, which each announced a partnership with the robo-provider Future Advisor this year. The online brokerages Fidelity Investments, Charles Schwab and E-Trade have launched robo advisers recently, too. They in some ways are catching up to a trend set by Wealthfront and Betterment, which founded the robo movement in 2008.

“There are many reasons for [Bank of America] to do this, so I’m not surprised they’re coming out with this,” said Alois Pirker, research director at Aite Group. The many robos that have launched in recent years are “an evolution the brokerage corner is going through,” he said. “Online brokerage is a very different business model. It’s very training heavy, and it’s not everybody’s cup of tea.”

Sean McDermott, senior analyst at Corporate Insight, pointed out that the bank stated about a year ago that it was actively pursuing a digital-advisory offering.

“It makes a lot of strategic sense for Bank of America to roll this offering out now,” he said. “Not only does it allow the firm to keep pace with key competitors, it will help them cope with some of the new burdens that the fiduciary requirement will impose on firms when it goes into practice next year,” referring to new Labor Department rules toughening fiduciary responsibility.

McDermott also noted that the wealth management industry is facing a looming wealth transfer as baby boomers move into retirement.

“This digital-advice offering should put Bank of America in a stronger position to attract and retain younger clients as the wealth management industry prepares to go after the next generation of investors,” he said.

Where B of A’s robo-advisory services will differ from existing ones is in the direction it receives from the staff of Merrill’s chief investment officer Christopher Hyzy, according to Levine. Hyzy’s staff chose the 10 ETF portfolios the robo service will draw from and will monitor their performance, Levine said. “It’s all done by the [chief investment officer’s] office as opposed to an algorithm,” he said.

The investor questionnaire will delve into more detail than some of the leading robo platforms, according to McDermott, who was given a preview. “That should help from a compliance standpoint and could theoretically translate to portfolio recommendations more accurately aligned with investors’ goals,” McDermott said.

The fee of 0.45% of assets under management is a bit higher than some of the others, McDermott said, “but the firm is likely betting on the fact that access to its [chief investment officer’s] investment strategies will assuage any concerns over a few basis points.”

Pirker said B of A’s offering is part of a new generation of robo tools that are more sophisticated than their predecessors.

“We see this type of platform bringing in a new era in the robo space,” he said. “What you see here is leveraging the existing capabilities of a top-notch wealth management firm and bringing that capability to that platform.”

Robo startups are also trying to bring more investment expertise into their apps, according to Pirker, but they are at a disadvantage because their resources are more limited.

Bank of America’s Merrill Lynch unit has 14,416 financial advisers and another 3,000 other employees who provide support (mostly over the phone) to online-brokerage customers.

B of A has no plans to reduce the number of human advisers, Levine said. “This does not take the place of advisers,” he said. “We anticipate that we will continually grow our advisers across that platform. This is a complement to the advice model.”

First appeared at AB