What’s Next for Robo-advisors, Robo-investors and the Traditional Model of Wealth Management?
June 9, 2016
by Pete Wasserman, Director, Research & Consulting
Recently, I’ve been fascinated by the emergence of robo-advisory tools and how they are shaping the financial services landscape. Robo-advisors are a new class of investment platform using algorithmic portfolio management principles to reduce costs and barriers to sophisticated financial advice across a range of investment vehicles. In addition, many of these robo-advisory platforms tout the democratizing power of their tools, providing the average person with the tools to manage their investments that previously only institutional investors had.
The robo-advisor trend is real and a super-hot topic right now, though there’s a few things that have been on my mind that I haven’t seen anyone talking about as it relates to this emerging and disruptive field of financial technology.
While the traditional investment and wealth management players such as the investment banks and brokerage houses have taken notice and begun either developing or acquiring robo-advisors of their own (see Charles Schwab’s Intelligent Advisor, or BlackRock’s acquisition of FutureAdvisor, or JP Morgan Chase and Goldman Sachs backing Motif Investments, or Vanguard’s launching of Personal Advisor Services, or Morgan Stanley poaching Schwab’s digital investing chief back in January. Need I go on?), the entrance of these bigger players doesn’t faze the upstart robo-advisors in the space. For one, those traditional players have a lot of catching up to do, and two, some of the appeal of the upstarts is they are not a part of Big Finance. (However, some would say the banks provide a level of stability and expertise the robo-advisor upstarts cannot… At least not yet.)
Still, it’s unclear how the traditional wealth managers and advisors will use robo-advisor tools, and how this capability will impact their traditional advisory workforce. How will traditional advisory services leverage robo-advising tools without cannibalizing their business model? What do the human advisors think of this shift and how can they stay relevant?
One reason why traditional wealth managers may be making a play in this space could be to target the high-net worth investor. While robo-advisors have utility for all types of investors, the upstart robo-advisors appeal mostly to young, middle income investors. (Betterment’s average investor is 35 years old, and 2/3s of their investors are Millennials.) I recently attended a panel with a number of robo-advisor founders and when asked, none of the robo-advisor upstarts claimed to have a product that targets the high-net worth investor, however the portfolio management principles could be applied to anyone.
That said, the robo-advisors are naturally geared towards Millennials because of their low fees, low barriers to entry, and high-tech/low-touch model of investment advice. Millennials are a sexy target market for any company looking to the future, particularly in the investment management space. The transfer of wealth from Boomers to Millennials is expected to be the largest in history, and having a trusted digital presence, including a low-touch digital investment platform, will be a big factor for banks and brokerages in the coming years.
A big piece that is typically missing from all of the talks about technology, platforms, and algorithms is the perspective of the robo-investor. There is a lot of discussion about the appeal of these tools to various audiences, but no mention of what happens to these investors as their investible assets grow and they mature in their wealth and wealth management needs. Is there a breaking point which will drive them to seek out traditional advisory services or services beyond their robo-advisor’s passive portfolio allocation and tax management? Do they see value in traditional advisory services at all?
Many of the robo-advisor naysayers will stand firm on their beliefs that nothing can replace the personal touch of a financial therapist (aka, financial advisor) or that the performance of the robo-advisors has yet to be borne out in times of uncertainty or volatility. However, robo-advisors are here, they are succeeding, and they are growing in number and size. How will traditional advisory firms adapt? How will robo-investors mature? Where do these two worlds converge and what does that investment management model look like?
I’d love to hear the thoughts of anyone who invests through a robo-advisor, is a traditional financial advisor or broker, or works at a robo-advisor or traditional brokerage.