Imitation is the sincerest form of flattery, but robo-advisor firms like Wealthfront and Betterment might not feel so flattered.
According to new research from global analytics firm Cerulli Associates, the entrance of Charles Schwab and Vanguard into the robo space will make it difficult for existing robo firms to compete.
“For [robo-advisors], imitation is a serious threat to their continued existence. These firms have rolled out innovative ideas, but the existing financial services industry has ample resources available to replicate the robo-advisor business model,” said Frederick Pickering, research analyst at Cerulli, in a statement. “Previously, many robo-advisors banked on the idea that financial firms were unwilling to duplicate their model for fear of upending their revenue. Wealth management firms responded to the innovator’s dilemma by building their own eRIA-inspired services.”
Not only are the business models of robo-advisors, which Cerulli refers to as “eRIAs” in its research, relatively easy to duplicate, but firms like Schwab and Vanguard have the resources to offer more services at a lower cost.
“Firms such as Vanguard, Charles Schwab and Fidelity possess the resources and talent available to create tax-efficient ETF portfolios, but more importantly, they are able to gather the fee on the underlying ETF,” according to the report. “This helps these firms scale the automated investment model and lower the cost of service to the end client.”
Recently, both Charles Schwab and Vanguard announced their move into the robo-space.
Schwab is replicating the Wealthfront and Betterment model by rolling out low-cost exchange-traded fund portfolios, called Schwab Intelligent Portfolios. (It took hits from Wealthfront and fellow robo-advisors when it launched.)
SIP charges no advisory fees, but clients pay the underlying expenses of the ETFs and are required to hold a percentage of assets in cash.
“The firms that will be successful in this landscape will be those large enough to realize the economies of scale necessary to turn a 25-basis-point fee into a profitable business model,” according to Cerulli. (Wealthfront charges 25 basis points a year on assets over $10,000.)
Before Schwab made its announcement, Vanguard had already announced its robo-style platform, Vanguard Personal Advisor Services, which quickly grew to $4.2 billion in assets as of the third quarter of 2014 from $755 million at the end of 2013.
Vanguard will offer this program for 30 basis points and allow clients to talk with their advisor via Apple’s FaceTime video platform.
“This feature is a major competitive advantage compared with the online-only model in which investors can save five basis points, but at the cost of being able to talk to a human,” the Cerulli report says. The report also points out an obstacle for robo-advisors that use Vanguard ETFs in their portfolios.