Rapidly Growing Robo Advice Market Inviting Target

A new study shows robotics-based investment advice is growing rapidly.

But larger investment firms are building stronger customer bases and are profiting more than others – much more – and that’s driving the growth of digital-based investment advice to new heights.

It’s a trend that should continue.

So-called “incumbent groups” (larger firms like Fidelity, Vanguard and Schwab) are literally taking over the robo-advice sector, at the expense of smaller firms, according to “U.S. Digital Advice: Consolidation, Fee Disruption, and the Battle of the Brands,” a study by Boston-based Aite Group.

“For robo-startups, it is do-or-die time now that incumbents are in the race,” said Aite senior analyst Javier Paz. “Over the next five years, the top 12 U.S. digital advisor firms will likely generate 99 percent of the industry revenue, and if your firm is not in that elite group, the future may not be too promising.”

Overall, the robo-advice market share among those incumbent investment firms will grow from 78 percent in 2016 to 93 percent by 2021, Aite reported. That would likely come at the expense of robo “start-up” firms like Betterment and Wealthfront.

There’s more at stake in the digital advice marketplace.

According to Aite, the number of robo-advice clients will rise from 1.8 million in 2016 to 17 million by 2021. Additionally, the size of the digital advice market will climb to $385 billion over the same timeframe, Cerulli Associates concluded.

The Future is Now

Yet the future really is now for the larger brokers and advisors who are already capitalizing on the robo-advice revolution.

Exhibit “A” is Vanguard Personal Advisor Service, a robo-platform with $65 billion in assets under management (AUM), by far the most of any digital investment advice provider. Clients flock to Vanguard for myriad reasons, but the account management fee of 0.3 percent of total assets is surely a big attraction.

Schwab Intelligent Portfolio is also in the mix, with $15.9 billion in AUM, with an annual management fee of 0.28 percent. Betterment, with $9 billion in AUM, charges 0.25 percent in average annual investment management fees.

Investment advisors surely know the rapid growth rate linked to robo-investment advice, and are starting to get aggressive about getting involved.

“We've had the greatest assets-under-management growth in the past year since our founding, with about $50 million in new investments,” said Kalen Holliday, director of marketing, communications and content at Interactive Brokers Asset Management. “Many of the 44 portfolios on our marketplace have attracted new money this year, particularly several of our smart beta portfolios launched in January.”

The robo-advice revolution is a “game changer” for money managers, Holliday said, adding that is isn’t clear which digital advice platform will dominate over the long haul.

Companies like Betterment and Wealthfront have built AUM very successfully, thanks in large part to big advertising budgets and low or no minimums.

“In Wealthfront's case, they’re managing the first $10,000 for free,” Holliday said. “That said, it's important to look beyond assets under management to the bottom line. I think the jury is still out on whether those business models will prove profitable.”

Humans For the Win

That jury also remains out on whether robotics-based financial advice, dynamic growth aside, can take a huge bite out of traditional, flesh-and-blood money management.

“Stock picking by humans still has the advantage because picking stocks is essentially analyzing and evaluating businesses,” said Yale Bock, a Covestor portfolio manager and President of Y H & C Investments, an investment advisory firm in Las Vegas.

Machines do this quantitatively, with qualitative factors assigned weights in their algorithms, Bock said.

“Businesses are dynamic entities, which naturally fluctuate based on all knowledge of factors, including market cycles, supply and demand of product, market positioning, management, organic versus growth by acquisition, brand power, and technology,” he said.

Humans can look at the specifics of an individual company and focus more extensively on a thorough evaluation of these qualitative factors which have more direct input on how companies operate, he added.

“The ability to have a more focused evaluation on the qualitative areas gives human stock pickers a lasting and natural advantage,” Bock said.

That may be so, but robotics-based portfolio management is making tremendous inroads into the money management industry.

And for now, it looks like all the usual suspects are controlling industry growth, and are cashing in on digital advice in ways few thought possible 10 years ago.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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