Independent robo-advisors will likely find it increasingly difficult to compete with the “industry behemoths” that launch robo services, according to a new white paper by Silver Lane Advisors.
The paper – titled “Have Roboadvisors Jumped the Shark?” – points to A.T. Kearney’s calculations that predict that robo-advisors will become mainstream over the next three to five years — growing at a 68% compound annual rate to $2.2 trillion in U.S. assets by 2020.
According to A.T. Kearney, roughly 20% of U.S. consumers who have a checking and/or savings account with a financial services provider are aware of robo-advisor services, and roughly 3% of such consumers have adopted the technology to date. The research finds that another 48% have indicated varying levels of interest in robo-advisory services.
“This implies that robo-advisors’ control of Americans’ investment assets will rise more than 10-fold from just 0.5% today to 5.6% five years from now,” Silver Lane’s report says.
Silver Lane outlines its top predictions about the future of robo-advisors. Here are five of those predictions:
Prediction #1: “This will be a big market.”
In its report, Silver Lane points to a recent report by A.T. Kearney that says online investment advisors are expected to gather $2.2 trillion of assets by 2020.
“We won’t opine on whether that’s the right number, but we’ll agree with the direction,” the report says.
After all, the idea of putting one’s retirement account on autopilot isn’t new.
“We’ve all seen the runaway success of target-date funds (TDFs), which, by some accounts, have amassed more than $1 trillion in assets and 20% of the defined contribution retirement market, while capturing roughly 40% of new 401(k) contributions annually,” the report says.
According to the report, some industry participants believe that the biggest component is likely to come from people who aren’t getting any advice currently.
Prediction #2: “Traditional advisors have caught on, so the leaderboard will change.”
Robo-advisors have awoken the sleeping beast, and the industry giants, like Schwab and Vanguard, have caught on.
When Schwab announced its own robo, Intelligent Portfolios, the platform attracted 33,000 accounts and $2.4 billion in AUM in less than three months. Shortly thereafter, Schwab released its Institutional Intelligent Portfolios, which allows advisors to create portfolios for clients using more than 450 ETFs across 28 asset classes.
“We estimate that it took Wealthfront approximately 3.5 years and Betterment a little more than four years to generate this many accounts, while Schwab’s 90-day AUM grab is bigger than either robo-advisor,” the report says.
Meanwhile, the report finds that Vanguard’s foray into robo-advice has been even more powerful.
“When the firm cut the minimum on its Personal Advisor Services product from $500,000 to $50,000, and lowered fees from 70 basis points to 30 basis points (plus fund expenses, which typically range from five to 19 basis points), it drew in $10 billion of new capital on top of the $11 billion that was in its previous program (Vanguard Asset Management Services),” according to the report.
Silver Lane predicts that most customers will look to the Internet as just an additional delivery channel to complement the way they currently access their investment accounts.
“The table is set for traditional advisors like Vanguard, Schwab and Fidelity (if it chooses to go it alone rather than continuing with platform access deals) to leapfrog the hard-fought gains of the largest independent robos,” the report says.
Prediction #3: “While many predict an across-the-board hit to the fee structure of traditional advisors, it’s more likely that the impact will center on lower-end offerings and/or on fee transparency.”
The report points to a study that estimates that 8% of the top advisory firms currently offer some sort of robo-advice, with another 20% planning to do so in the next 12-24 months.
“Our sense is that traditional advisors that wish to combat the robo-advisor wave are more likely to create a new, low-touch automated service offering (or to lower fees on semiautomated services) as a complement to their existing books of business, rather than to cut pricing across all channels,” the report says.
Silver Lane believes this is the right move – even “if it means rolling out a complementary, semi-automated product for smaller accounts at a lower price point.”
Vanguard is one example of this. The firm almost doubled the AUM in its Personal Advisor Services to $21 billion “albeit partly by cutting fees from 70 basis points to 30 basis points,” according to the report.
Even more so, Silver Lane predicts robo-advisors will force more transparency into the fee discussion.
“Advisors that are charging, say, upwards of 1.5% to manage a fairly standardized ETF portfolio without providing a lot of other value are clearly vulnerable,” the report says. “Investors will want more transparent fee structures to understand what they are paying and how they are paying it.”
Prediction #4: “Scale economies for independent robo-advisors will prove more difficult than expected.”
According to Silver Lane, the indie robos are going to have to do two things to stay in the game.
“Maintain high marketing expenditures to defend against much bigger brands coming into the space, and add more live advisors to raise service levels,” the report says. “Both are costly but necessary to survive longer term.”
Indie robo-advisors’ marketing faces steep competition against both the industry giants and the growing field.
“The industry giants have immeasurably more valuable brands, which is evident by their impressive asset gathering capabilities on recent robo launches,” the report says. “Also, competition will likely only increase over time as players enter the market, whether robo or traditional.”
Silver Lane also predicts non-marketing related costs at independent robo-advisors are likely to rise over time.
“[Offering a higher degree of hand-holding to the average customer] seems poised to happen as robo-advisors expand their customer bases beyond the initial group of technically savvy, early adopters; if such advisors wish to diversify into more sophisticated financial products; and/or if traditional advisors successfully pair a robo offering with live telephone advice, triggering a competitive response by the independent robos,” the report says.
Prediction #5: “State Street and Invesco are the ones to watch.”
Both State Street and Invesco have yet to make a move into the robo-space, but Silver Lane predicts they may be next.
Following Vanguard’s internal robo-product launch and Blackrock’s acquisition of FutureAdvisor, it could seem that other ETF heavyweights (like State Street and Invesco) are the “logical candidates” to make the next big splash into the robo world, the report says.
“The robo-advisor wave clearly can take several paths forward, with one potential being that the offering narrows in scope to a front engine for low-cost ETF funds,” the report says. “As such, State Street and Invesco have yet to make a major move in the space but would appear to be logical players given their major presence in ETFs.”
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