Robo advice is the newest disruptor in the financial industry and many advisors are not sure how to interpret this new investment advice solution. Some are writing it off as a solution for lower asset customers, some are concerned about the competitive threat, while others are embracing the technology for use in their own business. Regardless of perspective, the technology, introduced by start-ups like Betterment and Wealthfront, is achieving widespread adoption at financial service providers as either stand-alone solutions or in conjunction with more traditional advisory services.
Starting early in the evolution of these investment products, BackEnd Benchmarking opened and funded accounts at the most prominent robo advisors in order to collect unbiased data. There has been no data previously available to advisors on the performance or portfolios of robo advisors, which is why BackEnd Benchmarking created The Robo Report detailing this and more in-depth analysis that can be found at TheRoboReport.com.
The largest legacy players in the financial industry are embracing this technology and are exposing their many customers and the general public to robo advice options. The result will be significant growth in the market for digital investing solutions across the entire industry. The questions are, how will this affect traditional advisory businesses and what is the best response strategy.
Firms are taking note of the large volume of assets flowing into these platforms. They may also want to note that the assets are flowing disproportionately to the largest most established players. Vanguard’s Personal Advisory Service product recently announced $83 billion in AUM, which represents staggering growth of around $5 billion a month. The level of asset inflows is attracting competition, but for the time being, Vanguard’s product is an unrivaled success. The next two most successful robos, judged by assets under management, are Schwab and Betterment, with $14.9 billion and $10 billion, respectively. Assets are concentrating in the top few providers, while legacy players with deep pockets and large existing customer bases continue to enter the market.
We believe there are three major takeaways from this trend:
· First, independent robos are facing rapidly increasing competition from established financial institutions introducing robo products. This will likely lead to consolidation within independent robos. We believe only a few of the largest independent robos will achieve sufficient economies of scale to survive as independent companies in the long term.
· Second, investors will become more familiar with the solutions as more firms offer and promote them. A robo advice solution is increasingly becoming another standard offering at the major players in the advice market.
· Third, this will add to the larger trend of pricing pressure on financial advice providers. We do not believe robo advice will replace traditional advice, but traditional advisors must be prepared to defend their value propositions in the face of low-cost automated alternatives.
Currently, the robo advice industry is experiencing rapid introduction of new offerings. Here is a short list of just some of the new offerings: TIAA-CREF and Merrill Lynch both launched products early in the year. Zacks and T-Rowe price unveiled robos this spring. Morgan Stanley and Wells Fargo have said they hope to launch a robo advice solution later this year. Ally Financial integrated last year’s purchase of TradeKing, rebranding their product to Ally. Goldman Sachs is also rumored to be working on a robo advice solution.
The advice market is also seeing robo technology being implemented in more traditional firms. Some advisors are concerned about competition from within their own firms. Merrill Lynch and Morgan Stanley advisors are questioning whether or not robo technology will be a tool to help them provide better service to more clients, or if robo solutions will be competing with them for clients.
Firms have an eye on helping their advisors be more efficient, provide better service, and expand their markets. For example, some investors do not want or feel they need a dedicated live advisor and prefer a bare bones low cost solution. Equally important, many advisors have investment minimums and cannot profitably service clients below a certain asset threshold. Robo advice technology can help both clients and advisors by providing solutions that expand an advisor’s traditional client base.