The fourth quarter was another period of maturity for the robo-advisor sector, as the number of successful independent robo firms continued to dwindle amid the ongoing COVID-19 pandemic, according to the latest Robo Report, published by Backend Benchmarking.
“What used to be a niche product has become a standard option at most of the major consumer financial firms in the country,” the report said. “Many early entrants to the market were acquired by larger firms looking to quickly add a robo advice product. Meanwhile, many smaller firms never reached the scale necessary to operate profitably in this business due to tight margins and have since closed.”
Backend Benchmarking’s ranking includes qualitative factors, like clients’ access to advisors and financial planning features, as well as performance metrics of accounts held at each provider. Other factors that influence the rankings are related to transparency and conflicts, client experience on the platform, asset minimums, size and tenure of the robos, and costs.
Just after the end of the fourth quarter, UBS announced its acquisition of Wealthfront, “leaving only a small handful of successful robo firms that remain independent,” the report noted. That acquisition was “indicative of how the industry has matured and how founders and investors are looking for their exit,” Backend Benchmarking noted.
Although Betterment remains independent, its founder, Jon Stein, left the company earlier this year. And SoFi, a “neo-bank with a robo advisor offering, went public through a SPAC earlier this year,” the report pointed out.
Meanwhile, Acorns announced an acquisition by a SPAC but then “abandoned the deal,” the report noted.
As it stands, Betterment, micro-investing apps Acorns and Stash, Sallie Krawcheck’s Ellevest, and SoFi are the “few remaining major independents in the space,” the report said.
Robo Portfolio Performance
Although value stocks had “notable relative performance during the first portion of 2021, growth stocks ended the year higher, albeit just 3% higher when looking at” the Russell 1000 Growth Index compared with the Russell 1000 Value Index, the report said.
Those market movements “led to a regime of new top robo advisors for short-term performance,” according to the report.
Meanwhile, looking at trends from a fixed income perspective, high-quality bond holdings experienced losses as the 10-year U.S. Treasury rates grew from about 0.9% to 1.5%, causing the Barclays Bloomberg Aggregate Bond Index to decline by 1.5% in 2021.
Short-duration bonds “held up better, as did municipal issues and high-yield bonds,” the report pointed out.
In short, “robo advisors with diversified bond holdings supported returns while those tied to solely core, investment-grade bonds suffered losses,” the report said.
Looking at the five-year period ended Dec. 31, Fidelity Go, SigFig and Axos were the top performers for the half-decade.
Common themes among those advisors included a “bias towards large-cap stocks over mid- and small-cap names, an overweight to growth stocks, and, not surprisingly, a healthy U.S. bias,” according to the report.
“One interesting note is that when expressing this growth bias, it is not so much that these advisors had specific growth-oriented funds, but rather that by holding the standard market-cap weighted ETFs, they enjoyed significant returns compared to those robo advisors who deliberately added value-oriented ETFs to bring portfolios to a more balanced position,” the report said.
“With value being in significant favor” for the year-to-date period ended Feb. 22, “we expect a new set of robos to be the top performers in future editions,” the report predicted.
See the top-ranked robo-advisors for the fourth quarter of 2021 in the gallery above.