Online retail advice companies capture the headlines but it’s the online defined contribution-focused advisory firms that have snagged the lion’s share of retirement assets, according to recent research.
Furthermore, it’s the discount brokerage companies and mutual funds, not the standalone online retail advisories, that are most likely to survive in the long run.
This may come as a surprise to people who consider internet-based algorithms, or roboadvisors, the future of retirement investing, particularly in the middle market where investors are drawn to low-cost fee structures and technology-based platforms.
The narrow trend of standalone online retail-oriented advisors gobbling up assets is overstated, while the broader trend of online advice companies collecting defined contribution assets is understated, said consultant Chip Roame of Tiburon Strategic Advisors.
At the end of last year, standalone online advice companies only had 3 percent of the $217.4 billion in assets under management (AUM) by online-only advice companies.
Discount brokerage companies and the mutual fund complexes with online-only advisory divisions controlled 11 percent of the online advice market, according to Tiburon research.
For the moment, the big winners in the online advice market are the defined contribution-focused firms such as Financial Engines and Morningstar. These advisories have grown to command an 86 percent market share in the online advice market, Roame said.
Among the defined contribution-plan focused firms, Financial Engines revved to the top with $114.5 billion in AUM at the end of last year, followed by Morningstar (retirement) with $38.7 billion and Guided Choice with $12.4 billion.
All told, between the standalone roboadvisors, the discount brokerages and the mutual funds with an online-only presence, there were an estimated 45 or 50 companies operating in the online-only advice market, Roame said.
Discount Brokerage, Mutual Funds to Prevail
Traditional financial advisors underestimate the power of the discounters such as Charles Schwab, E-Trade Financial and TD Ameritrade.
Schwab’s retail arm, Schwab Investors Services, is a $1.4 trillion firm. So when traditional advisors cast aspersions on the discounters, “realize those firms are 50 percent bigger than a UBS, or they’re twice the size of an Ameriprise, or they are two-and-a-half times the size of an Edward Jones," Roame said.
“I think that the financial advisor channels, the traditional financial advisor channels like to look down their nose at the discount brokers and think that it’s some inferior offer that hasn't grow all that much,” said Roame, managing partner with Tiburon and a former Schwab executive. “I will tell you, it's just simply an unfair view, I think.”
Jon Stein, CEO and founder of Betterment, which manages $3.9 billion in retail, 401(k) and institutional assets, said a new $100 million round of venture funding announced at the end of March was necessary to compete with Vanguard’s Personal Advisor Services.
For online-only retail advisors such as Betterment, Wealthfront and Personal Capital, the category remains a cacophony of new company launches every year struggling to stay afloat in a pool with only 3 percent of the online-only advice market.
To survive, those standalone retail online-only advisories will have to grow, merge or sell before the venture capital financing spigot dries up.
The standalone firms are “left in the dust with about 3 percent of the market. Collectively that's what they have. So give that a thought,” Roame said.
Using Roboadvisors as a Tool
The online-only advisor channel is still in its relatively infancy compared with the established networks of flesh-and-blood advisors operating out of brick-and-mortar offices.
Yet the correlation between advisors who use online-only tools and the amount of assets they manage is inescapable.
Findings of a Harris Poll conducted in April 2015 and commissioned by Jefferson National indicate that the more assets an advisor manages, the more familiar with internet-based investment help the advisor is likely to be.
The survey of more than 500 registered investment advisors and fee-based advisors found that 51 percent plan to use online-only tools for clients with less than $500,000. In addition, 52 percent of advisors already use online-only tools for clients with more than $1 million, the survey also found.
“Roboadvice is a tool for top advisors—and an effective solution for both HNW (high net worth) clients and older clients,” the survey said.
Earlier this week, UBS and the San Francisco online-only advisor SigFig Wealth Management announced that UBS’s 7,000 U.S. wealth advisors would begin using SigFig’s online investment technology to help automate investment decisions.
The technology isn’t meant to replace UBS’s advisors, though it is hoped it will make those advisors more productive. The technology is designed to help advisors held clients make better investment choices.
Just how wealthy are those UBS advisors? In the first quarter, UBS’s average financial advisor had a reported $147 million in invested assets and $1.06 million in revenue.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]
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