In the changing world of financial advisory services, it’s not just the traditional advisors who have to adjust but also the robo-advisors that have been leading the disruption.
According to the latest Cerulli Edge report, software-only eRIAs – electronic registered investment advisors, Cerulli’s term for robo-advisors — are operating in a business threatened with commoditization, which will depress fees that are already under pressure from the entrée of Schwab and Vanguard, soon to be joined by BlackRock (BLK). (BlackRock’s acquisition of FutureAdvisor, a robo-advisor, is expected to close in the fourth quarter.)
“eRIAs will need to grow approximately 50%-60% per year for the next six years and gather approximately $35 billion in AUM to remain a standalone direct channel for consumer business,” says Federick Pickering, research analyst at Cerulli.
“Ultimately the eRIA services need to prove themselves as a business model and not a technology offering,” the Cerulli report states. The business, which is expected to more than triple in size this year, is under pressure on many fronts, according to Cerulli:
- Robo-advisors lack an economic “moat,” or barrier to competition
- They are unable to charge higher premiums in an increasingly competitive market where major institutions have started their own robo-advisory service or and big independent robo-advisors like Betterment and Wealthfront are cutting fees or minimums, or both
- They don’t have the deep pockets needed for massive marketing campaigns
- Their venture capitalists, which initially financed their operations, want to see high double-digit growth, which will become increasingly difficult as assets grow and especially difficult if markets weaken
Given all these pressures, Cerulli suggests that robo-advisors consider “pivoting to a business-to-business model.”
Betterment, for example, has been moving in that direction with its partnership with Fidelity Institutional Wealth and its recent announcement of a 401(k) offering, Betterment for Business, beginning next year.
Cerulli suggests that eRIAs partner with banks, especially smaller regional banks; smaller RIA firms; and independent broker-dealers who haven’t built their own robo-advisory service, becoming a third-party vendor (TPV).