Here at BackEnd Benchmarking we have recently released the 4th quarter 2017 edition of The Robo ReportTM. In this report, we took an in-depth look at two-year returns of seven different portfolios with a full two years’ worth of data. The 4th quarter of 2017 was a strong finish to a strong year in the equity markets, and for the digital advice industry as a whole. Since the end of the year, market turmoil has shaken equity markets and tested the systems of robo advice providers. Despite some technical issues experienced by some robos during recent tumultuous market days, digital advice is expanding across the financial services landscape. Interviews this quarter with TD Ameritrade, Merrill Edge, and Schwab gave us insight into where these products are fitting in among client bases, and we are starting to get a clearer picture of where digital advice products are gaining the most traction.

Interviews with TD Ameritrade, Schwab and Merrill Edge this quarter provided two key insights into the robo advice client. Digital advice solutions appear to be fitting in nicely between self-directed clients and those with traditional advisors. It also appears that digital advice is finding the most success attracting previously self-directed and new-to-investing clients. This helps explain why we continue to hear that robo advice is attracting clients across the age and asset spectrum. The average age of clients at many robo advisors is between 40 and 50, not between 20 and 30 like many people believe.

Tobin McDaniels, Senior Vice President of Digital Advice and Innovation at Schwab, summed this up nicely in our interview: “What we are really seeing are people who generally did not avail themselves of any form of financial advice coming to us… It’s been remarkable to see how it does really cut across the traditional demographic cut; it’s more of a mindset then demographic.” The key takeaway is that the rapid growth of assets managed by robo advisors may primarily be coming from an expanded market for professional advice instead of stealing market share from traditional advisors. Over the long run, this could have serious implications for traditional advice providers, particularly independent ones.

Another trend we have seen is traditional robo advisors adding higher levels of service. It is now common for robo advice providers to not only offer a pure digital solution, but to also offer access to live advisors for a higher fee. This helps robo providers segment their markets. This also means that when a client who was new to investing at first is ready to graduate to a more personalized solution, they may decide to upgrade their service at their existing advice provider instead of seeking out a new relationship with a traditional advice firm. The idea of robo advice clients graduating to higher value services fits well into the business model of large institutional players like Morgan Stanley and Wells Fargo, both of which launched robo advice products in the 4th quarter of 2017. It has yet to be determined, but digital advice offerings may be an effective way to bring on financial advice clients before they are ready or looking for a traditional advice provider. A digital advice solution may prove to be an important stepping stone between those who do not currently receive professional investment advice and traditional advice. The rate at which clients graduate to higher level of service as their financial situation grows in complexity has yet to play out.