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.