Robo Advice Data for Q3 2017 Now Available for Advisors

The Robo Report™ has opened accounts across the most prominent robo advisors and tracks performance across the portfolios. The portfolios are created by presenting the same investor type to robo advisors, seeking a moderate portfolio of 60% equities and 40% fixed income in the taxable accounts and the most aggressive portfolio available in the IRA accounts. By opening and tracking real accounts, BackEnd Benchmarking seeks to provide transparency in the robo advice industry.

Robo advice is continuing to take hold among advisors and investors. Over the last year alone T. Rowe Price, Zacks Advantage, TIAA, TD Ameritrade, Merrill Lynch, and Wells Fargo have all released digital advice products. Additionally, LPL and Cetera Financial Group both recently made a robo advice product available to their advisors to market to end clients. Although robo advice is continuing to gain traction, and low-cost digital advice products are being made increasingly available across institutions, investors choosing these options still make up a relatively small share of the advice market. A recent Investment News survey found only 4% of mass affluent and high-net-worth respondents reported using a robo advice tool. That being said, digital advice products are finding success with both older and higher-net-worth clients. Personal Capital, a service that offers a digital investment service paired with a traditional advisor, says 11% of their clients have over $1 million invested with them. Vanguard reports 85% of their Personal Advisor Services clients are over age 50, while Schwab reports that 53% of clients in their Intelligent Advisory Service are over age 55.

The steady stream of incumbent firms releasing automated advice tools is putting pressure on the independent robo advice firms. Incumbent players have multiple lines of business and opportunities to generate revenue outside of the management fee. For example, Schwab mandates a large cash portion in their portfolios. This cash is swept into an FDIC-insured account and helps generate revenue from lending activities. Additionally, revenue is generated on the Schwab ETFs held in the accounts. Furthermore, Schwab has a wide suite of traditional investment services at the ready if a client decides their needs are no longer being met with their robo or hybrid robo advice service. Independent robo advice firms do not have the same advantages of many incumbent players but they can build on their success as innovators.

As competition heats up, both independent and incumbent robo advisors are trying to differentiate themselves through increased features and market segmentation. Independent robos in particular are broadening their product offerings and services. Betterment introduced live advisors earlier this year and just recently introduced a charitable giving feature that helps their clients make tax-smart donations of appreciated stock. WiseBanyan recently shared with us their introduction of life insurance to their product offerings, while Wealthfront now offers loans secured by the client’s portfolio. Meanwhile, Stash announced they have plans to introduce the availability of traditional bank accounts alongside their client’s investments accounts. These three areas--insurance, banking, and lending--are all logical industries for robo advisors to expand into, and we anticipate seeing more product offerings in these categories in the future.

By far, the feature that we have seen introduced the most this year is access to socially responsible investment options. These are portfolios that take into account ethical, environmental, or other non-finance related variables when selecting investments. Socially responsible investing portfolios have sprung up at Motif, Hedgeable, TIAA, Betterment, and WealthSimple, and is anticipated as part of the upcoming Morgan Stanley offering. This is on top of robo advisors that specialize in this type of investing like Earthfolio and OpenInvest. As firms quickly adopt each other’s popular features it will be difficult to stay ahead of the curve.