Online financial startups are starting to take root with investors. A report released Wednesday by Corporate Insight analyzed 11 online investment advice providers and found that combined they have more than $11.5 billion under management or advisement.
The majority of that is under advisement, the report found, as those firms reported they provide paid advice for $9 billion in client assets. Online startups directly manage $2.6 billion in client assets, according to the report.
Data for the report was pulled from publicly available information. Corporate Insight also conducted interviews with executives at several firms.
Corporate Insight tracks more than 200 online financial services startups, but this analysis only included data from the 11 best-known firms: Assetbuilder, Betterment, Covestor, Financial Guard, FutureAdvisor, Jemstep, MarketRiders, Personal Capital, RebalanceIRA, SigFig and Wealthfront. The services those firms offer include algorithm-based advice and advice from real advisors who meet with clients virtually.
Those firms are among the oldest and largest of the startups Corporate Insight tracks, according to Grant Easterbrook, an analyst for Corporate Insight. Considering how new the services are though, “old” is relative.
“With a few exceptions — Covestor, MarketRiders are a little older — most of these services have gone live in the last year or two. Overall, they’re pretty young,” he said.
“The basic idea here is they’re trying to build a very scalable model. They want to make it very low-cost at each new customer,” Easterbrook said. They can also onboard clients quickly with online tools.
“Some of these firms have got scale through partnerships. Some of them have just built up assets from the ground up.” The key, Easterbrook said, is that these firms have been able to build scale much more quickly than traditional firms so they can add new clients quickly.
Although users of these services tend to be young, Easterbrook noted that they aren’t necessarily targeting a younger clientele.
“For the most part, these services target the mass affluent, people who don’t meet the minimum to work with a traditional financial advisor,” Easterbrook said. “That tends to skew younger, but while they have a lot of young clients, their focus is on the so-called mass affluent and that sweet spot where they can serve them properly if they do a scalable, low-cost service.”
And while they don’t present much of a threat to traditional advisors today, Easterbrook said they “fit into a long-term bigger problem for advisors.” As baby boomers begin retiring, wealth management firms that want to grow will have to shift to serving Gen X and Gen Y, he said. “As that shift slowly happens, think about Gen X and Gen Y: They have different preferences than their boomer parents.” Easterbrook ticked off some of those preferences: “They don’t see as much value in regular quarterly meetings. They have much higher standards for online and mobile services. They’re a lot more diverse than the current crop of financial advisors. They’re a little more concerned about shopping around for price online. They’re more concerned about transparency. They have a negative, too-big-to-fail brand perception of some of the bigger firms.”
He continued, “If you take all those factors into consideration, a lot of what Gen X and Gen Y wants doesn’t really fit the current business model of some of these wealth management firms. It’s a lot more like what some of these new firms are doing. These firms as they grow are much better positioned long-term to serve Gen X and Y than some of these legacy wealth management firms.”
There are some areas where advisors won’t be challenged by these online services, though. “Some things are pretty hard to automate,” Easterbrook said. “It’s hard to automate estate planning or complicated high-net-worth planning, trust accounts. Some things just have too much money on the line, and it’s too complex for an affluent investor to feel comfortable using a do-it-yourself online service.”