Can Online Services Replace Merrill Lynch?

NEW YORK ( TheStreet ) -- Some prominent Silicon Valley investors are backing a startup called Wealthfront that aims to provide cheap online money management for the masses.

Having raised $30 million in venture capital, Wealthfront is growing rapidly by offering portfolios of exchange-traded funds at rock-bottom prices. The two-year-old company manages $700 million in assets. Most clients pay 0.25% in annual fees to invest in index-tracking exchange-traded funds. In contrast, conventional financial advisers charge 1.0% or more.

Will old-fashioned advisers like Bank of America's (BAC) Merrill Lynch have to cut their fees or risk going the way of black-and-white TVs? Probably not. Traditional advisers provide personal service, listening to problems and producing customized investments. Wealthfront does everything online. Clients answer questions about their risk tolerance and goals, and the online services provide suitable portfolios.

Wealthfront is part of a growing wave of online financial advisers. Other entrants include Betterment and Personal Capital. So far most of the online clients are young tech-savvy people. Many work for Internet employers such as Google (GOOG) and Facebook (FB).

Wealthfront says 60% of its clients are under 35. "Young people like automated systems and they hate fees," says Adam Nash, CEO of Wealthfront. "They are highly cynical about active managers who say that they can beat the markets."

The new services all compete ferociously on costs. Betterment, which has $410 million in assets, charges 0.15% for clients with more than $100,000 invested. While the fees are low, the businesses are not cheap to run. All the companies compete for top computer software engineers and investment managers.

Executives concede that the companies may not be profitable until they grow substantially. "This is the kind of business that only gets exciting when you manage billions or tens of billions of dollars," says Nash of Wealthfront.

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