February 26, 2018
Every day, emerging technologies are bringing in newer dimensions to the financial services industry. Robo-advisors, generally referred to as online investment services that deliver algorithmically derived financial advice, brought a new wave of automated, low-cost investment advisory in the wealth management space. Some of the early FinTech innovators, led by Wealthfront and Betterment, got everyone enthusiastic with their advanced AI/ML and automation capabilities, as well as easy access for a broader range of customers by virtue of low fee. Sensing the depth of this opportunity, hundreds of startups then followed suit and tried to shake the investment world with their offerings.
The traditional incumbents weren’t going to be left behind. Some of the leading incumbents not only took a notice of this opportunity but embraced it and took action. They went through a dynamic shift – from a traditional approach to a trendy one – attracting millennials by introducing robo-advisory platforms. Vanguard launched its hybrid robo-advisor in 2015, followed by Charles Schwab’s fully digital platform. Since then, several incumbents have joined the bandwagon via their in-house pure-play digital/hybrid offerings as well as strategic partnerships with FinTechs.
Apart from Vanguard and Charles Scwab, who are clearly leading the market today, some of the major incumbents with robo-advisory services are Fidelity Go, Morgan Stanley, Capital One, BNP Paribas, UBS, Merrill Lynch, BBVA-FutureAdvisor, Wells Fargo-SigFig, etc.
These robo-advisory platforms promised to provide customers with well-diversified investment portfolios suitable for their risk tolerance and long-term investment objectives. The growth and development of the robo-advice industry not only had positive financial implications as a result of lower fees but also automated systems facilitated inclusion for mass market consumers with < $200K. Consumers could afford a tailored advice for better use of their funds at a very reasonable fee. Robo-advisors displayed an attractive technology proposition and unique automated experience. Though FinTech startups emerged as a trendsetter in this space, all is not going well for them at the moment.
Barring a handful of startups, most of the robo-advisors are yet to cross the 1-billion-dollar mark in AUM. Betterment, Wealthfront, and Personal Capital are among the select few with over $5 billion in AUM. Meanwhile, their incumbent counterparts, Vanguard, and Charles Schwab are leading the AUM race with $101 billion and $27 billion in AUM, that too within three years of their launch.
While one can argue that these startups are targeting less-wealthy investor segments, the bottom line seems to be the fact that it will take a long time for these startups and their pure-play digital offerings to gain the level of trust that a traditional advisor holds. According to a GfK survey, only 10% of all participants said they would be likely to trust a computer algorithm more than a human to give them financial advice – with a full 50% disagreeing with this statement. Looking at a range of financial products, consumers are still largely apprehensive towards completely automated customer service for investments and mortgages. This is where the most important point lies – the quite-essential human touch.
The leading incumbents in the robo-advisory space – Vanguard, Charles Schwab, and Fidelity Go – offer a hybrid service where they provide a human advisor on top of their digital platform.
Betterment, which started off as a pure-play robo-advisor, has also begun to offer hybrid service at a higher fee. The new hybrid system is expected to bring in a new category of customers and could also increase Betterment’s average account size significantly. A few other startups such as Personal Capital also offer hybrid robo-advisory.
With the new-found hybrid formula of success gaining traction, the general trend of discussions seems to be shifting from robo-advisors vs. humans to robo-advisors + humans.
To sum up, the incumbents are clearly leading the AUM race, the startups are beginning to realize the value of a human touch, and this wealth management duel continues to amaze the FinTech ecosystem.