Expert Predicts Big Shakeout Among Roboadvisors

The online advice market is projected to triple in the next five years, and dozens of roboadvisors will be affected as a shakeout erupts in the marketplace.

That’s the prediction of one expert, who forecast that roboadvisors that are in the business-to-consumer and wholesale segments will soon be acquired, if they haven’t been already.

The online advice market is expected to grow to between $600 billion and $700 billion in the next five years, said Chip Roame, managing director of Tiburon Strategic Advisors in Tiburon, Calif. Roame’s firm recently completed a 600-page report on trends in the roboadvisor market.

Roame predicted that the growth in the marketplace will mean that some segments of the market will do better than others. In particular, he predicted that firms focused on defined contribution plans, along with discount brokerage companies and mutual funds, will prevail in the coming shakeout.

Roboadvisor acquisitions already are a reality, he noted, with LearnVest’s sale to Northwestern Mutual, FutureAdvisors’ sale to Blackrock, and the sale of Covestor to Interactive Brokers Group.

The sale price for each transaction is estimated at between $50 million and $250 million, Roame added.

“Those are great numbers,” Roame said in a research call for Tiburon clients earlier this month. “Even if you are narrowly defined and not make it standalone, selling out for $250 million isn’t the end of the world.”

In the wholesale segment, where Tiburon counts 11 companies, Envestnet announced the purchase of Upside Holdings.

“To be a standalone roboadvisor technology wholesale firm will be relatively difficult model,” Roame said.

Roboadvisors are Internet-based algorithms that offer investment advice and help with asset allocation without the help of human intervention.

Internet-based algorithms have taken over many simple investing tasks and have cut the costs of paying for the advice offered by flesh-and-blood middlemen. The past decade has seen a surge in Internet-based advisors.

As a result, assets managed by roboadvisors have grown to an estimated $218 billion in 2015 since the first roboadvisor was launched nearly 20 years ago.

Internet-based advice appeals to younger investors who haven’t accumulated much in the way of assets or don’t have complex investment planning needs. As investors grow and mature, and needs broaden into insurance and estate tax planning, the financial planning skills of flesh-and-blood advisors become more important.

Over the past several years, a number of roboadvisors have emerged. Roame said the market now can be divided into four segments: the defined contribution plan segment, the wholesale roboadvisor segment and the business-to-consumer segment, which can be divided into two smaller subsegments.

In the defined contribution plan roboadvisor segment, which is often overlooked by many research reports, Roame said companies with the largest market share include Financial Engines, Morningstar, GuidedChioce, Fidelity, Stadian, ProManage and Brinker Capital.

In the business-to-consumer segment, there are about 22 venture capital-backed roboadvisors in the marketplace. The lineup is led by Betterment, Wealthfront and Personal Capital, names that have garnered media headlines.

The 22 companies in this part of the business-to-consumer segment control about $8.2 billion in assets and few — if any — have turned a profit. It’s only a matter of time before the venture capital companies backing these narrowly defined roboadvisors lose patience, Roame said.

The second half of the business-to-consumer segment is controlled by discount brokerage companies and mutual funds with an estimated $20 billion to $30 billion in roboadvisor assets under management.

The three leaders in that subsegment are Vangard, Schwab and TD Ameritrade, with about three times the amount of assets under management compared with the 22 companies that make up the rest of the business-to-consumer segment.

The brokerage companies and mutual funds started with flesh-and-blood advisors and have more recently added Internet algorithms for clients.

In all, there are about 25 roboadvisor companies competing in the business-to-consumer segment, but among the 22 companies considered pure roboadvisors, only and estimated three to five will survive in the long run, he said.

The coming mergers and acquisition “will probably be quite aggressive in this space and some of that will be selling out from a position of strength and some of that will be selling out from a position of weakness,” Roame said.

“So you are already seeing some of the bigger firms, the more institutionally minded firms, the firms with the much bigger advertising budgets, much bigger capital bases taking out the roboadvisors,” he said.

Defined contribution plans operated through roboadvice platforms will continue to be successful as the idea of managed accounts inside the 401(k) has become a popular trend among in the defined contribution market.

In the end, Roame sees the roboadvice market dominated by defined contribution plan-focused firms as well as discount brokerage companies and the mutual funds. Eventually, the big institutional brands will own 80 percent to 90 percent of the market five or 10 years out, he said.

Financial advisors who don’t think Internet-based financial advice will have an impact on their business are naïve and have their “heads in the sand,” Roame also said.

Successful, large institutional financial advisory firms will have a roboadvisor offering that will merge with the flesh-and-blood advisory channel over time.

“Today there’s a dichotomy between advisors and robos,” he said. “I don’t think that’s where we end up. I think the advisors and the large advisor forces integrate the robotechnology over time.”

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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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].