The robo-advisory industry is moving into its next phase, from disrupting traditional financial advisory services with cheap, passive asset management and low minimums, to taking on traditional deposit banking with cash management and saving products.
We’re starting to see the early phases of an evolution,” said David Goldstone, analyst at Backend Benchmarking, which publishes The Robo Report.
(Related: The Best Performing Robo-Advisors of 2018)
Its latest edition, which covers the first quarter of 2019, is filled with examples of these offerings, though some predate that quarter:
- Wealthfront’s FDIC-insured high-interest cash accounts with an APY of 2.29%
- Betterment’s Smart Saver account, which invests in short-term bonds and can be linked to a Two-Way Sweep that gathers excess money from a customer’s bank account to earn a higher interest rate and reverse that transaction if the bank account balance runs low
- SoFi’s online checking account, which links to a savings account that is federally insured
- Stash Banking and Acorns Spend, which issue debit cards whose purchases are rounded up to the nearest dollar and the difference between the purchase price and the roundup is invested. Acorns invests the excess funds in ETFs; Stash invests them in fractional equity shares. Both programs are also linked to FDIC-insured banks.
“The expansion from digital investment advice to cash management and banking is well underway,” according to The Robo Report. “These attractive offers from fintech companies will continue to ramp up competition amongst traditional financial advice firms and banks.”
A number of robo-advisors will also have more money available to fund business expansion. Acorns, Personal Capital, Ellevest and Nutmeg, a U.K.-based robo-advisor, raised a cumulative $250 million in the first quarter, according to The Robo Report.
“There’s still an appetite from venture capital for investing in independent robos who have become established, with a large customer base,” said Goldstone.
One robo reportedly is attracting more than most. Bloomberg reported that SoFi is closing in on a $500 million round of funding Qatar Investment Authority and others, according to four people familiar with the matter. SoFi declined to comment on the report.
The firm has been steadily expanding operations from student loan refinancing, its initial offering, starting in 2011. SoFi subsequently expanded into personal loans and mortgages and robo-advisory services, and earlier this year began offering no-fee brokerage for stock and ETF trades, followed by its first zero-fee ETFs in April, which proved somewhat problematic.
The Robo Report recounts that the day after it the no-fee ETFs began trading, SoFi replaced the Vanguard Total Stock Market ETF in its portfolio — the report invests in each of the robos it analyzes – with two propriety no-fee SoFi ETFs — the SoFi Select 500 ETF and SoFi Next 500 ETF. The ETFs invest in the 500 large and 500 mid-cap U.S. companies, respectively, based on certain fundamental factors.
Those trades resulted in both short and long-term capital gains for The Robo Report’s SoFi portfolio. Like other clients of SoFi, it was told in advance about the pending changes but was not given the option to opt out of the fund or transfer to a self-directed account.
“SoFi has a fiduciary responsibility,” said Backend Benchmarking Founder Ken Schapiro. “It should have given clients the option.”
Asked about his outlook for the robo-advisory industry, Schapiro said the hybrid model, which includes digital and human advice, makes the most sense, and Schwab’s new subscription-based fixed fee hybrid provides the best of both worlds. “It’s inexpensive digital advice combined with an actual person.” He expects more assets will find their way into that space.
Goldstone expects that lending will be the next “logical” offerings from robos, a service SoFi already provides. The challenge for all robos, especially those that are independent, remains whether they will accumulate enough assets under management to become profitable, said Goldstone.
— Related on ThinkAdvisor: