Robo advisor market heating up as incumbents get in the game

Competition in the robo advisor market is set to increase as companies are stepping up their efforts to get a larger slice of the pie and a number of incumbents are joining the race.

The so called “robo advisors” are automated services using computer algorithms to provide financial advice with minimal human intervention.

They have become a popular model for wealth management in the past years, providing consumers with access to services which had before been reserved for the top 1% of wealthiest of clients.

$64 trillion investable assets

At a recent webinar, research company CB Insights, outlined the advantages and challenges in the robo advisor market.

The space looks ripe for growth going forward, driven by large consumer capitals looking for a fitting investment solution and a lack of transparency in the services of traditional wealth managers.

A report by Boston College Center of Wealth and Philanthropy from the beginning of 2017 predicted a significant increase in the volume of US household assets in the next years. The amount is expected to go up to $140 trillion from $87 trillion in 2016. Out of the total, a whopping $64 trillion will be investable assets.

In addition, by 2061, baby boomers are expected to transfer to millennials a total $36 trillion.

At the same time, as many as 30% of non-retired Americans have no retirement savings, according to Fed’s latest Economic Well-Being survey.

Retirement is a top concern for the top tier households, earning over $100,000 per year. Many of them have indicated that they lack confidence in their ability to manage their retirement investments, Fed said.

Trust shifts to tech

Such factors have resulted in a rise of robotic investment advisor services which offer competitive and transparent fixed fees.

Many of them require very low to no deposits to open an account, compared to an average of $50,000 minimum deposit demanded by wealth managers.

As Rick Yang, Partner at California venture capital firm New Enterprise Associates said in a 2016 interview, “There’s a massive shift in consumer behavior and consumer trust. I think coming out of [the financial crisis], millennials have a massive distrust of existing financial services. They tend to trust technology more than the recognized stalwart brands, like a JPMorgan Chase or a Wells Fargo.”

As a result, robo advisor companies like Betterment, Wealthfront and Motif in the US, and Nutmeg in the UK, started to surface in the aftermath of the 2008 financial crises.

Their services include automated allocation, managing, and optimizing investors’ savings and portfolios. Some firms serve individual investors directly, provide software to institutional investors, or use a hybrid model combining software and human advisory.

A total of 65 robotic advisors have raised collectively over $2 billion in capital across 191 deals since 2013, data of CB Insights shows.

An army of client accounts

Through technology, such companies are able to reduce wealth management fees and create access for new sets of clients in nearly 20 countries, the company said.

The largest deals were reported by Betterment which has raised $275 million, Wealthfront with $130 million, Stash with almost $79 million and Acorns with $73 million.

As a result, they have grown “an army of client accounts” in the past years. Acorns is leading the game with 1.3 million accounts since 2014. The number of accounts has peaked in 2017. Stash, for example, has garnered the majority of its 983,000 accounts throughout the current year. In the first quarter of 2017, the company introduced a B2B service, resulting in a 531% increase in accounts. Betterment and Wealthfront have 353,000 and 194,000 accounts respectively.

The latter two companies are market leaders in terms of assets under management (AUM). As of November 2017, Betterment has over $10 billion in AUM compared to $8.2 billion for Wealthfront. Acorns and Stash are with $528 million and $125 million respectively.

They are all employing different models as a means to attract clients and get a competitive edge in a constantly growing market.

“Betterment added a hybrid model with access to human advisors”, CB Insights data shows. Earlier in 2017, the company launched a premium type of accounts with live specialist offering clients expert advice.

“Wealthfront is adding technology-backed investment services. Acorns is dipping into retirement by acquiring Vault, a 401 (K) for SMBs. Stash is adding in-house retirement services and bank account services”.

Also in 2017, Wealthfront has introduced its automated financial planning service Path, as well as advanced indexing and tax-loss harvesting.

Acorns, in turn, has made efforts to gamify investing through partnerships with some 150 consumer brands like Apple, Nike, Airbnb, Groupon and others. Partner brands incentivize investors to spend by offering a kickback to their Acorns investment account.

“Me too” robo – strategy.

This massive growth led to a number of incumbents dipping their toes in the robo advisor ocean. Some insurers have decided to launch their own ETFs, while a few Wall Street firms have introduced robots for a number of tasks, replacing humans.

As CB Insights notes, the incumbents are playing catch-up, having to make a choice between a Partner, Build or a Buy approach.

“Initial skeptics now view robo -advisors as a credible threat”, the company says. “Firms across the financial services sector are scrambling to pull together a “me too” robo – strategy. Firms have been partnering by investing and bringing services in – house, building their own offerings, or buying upstarts.”

Banks and their innovation departments have made sizable investments in wealth tech startups.

Santander and UBS have invested in US robo advisor Sigfig. Citi Ventures and Northwestern Mutual co-invested in Betterment. Goldman Sachs and JP Morgan Chase are among the investors of Motif.

Some startups have provided banks with white-label solutions. UBS, Wells Fargo and others have used Motif’s white-label robo advisor for their own digital wealth management strategy. John Hancock and State Street Global Advisors turned to Nextcapital for a white-label software.

There have been a number of strategic acquisitions on both the active and passive management sides, in the US and Europe alike.

Vanguard and Charles Schwab were the first ones to launch digital platforms on their own. Many more followed suite. Goldman Sachs, Raymond James, Wells Fargo and HSBC have all announced robos in the pipeline.

Insurers, including USAA, John Hancock, Transamerica, Nationwide, Hartford Funds, and Principal have all launched their own ETFs.

Looking ahead

Amidst heated competition, robo companies are faced with uncertain regulatory landscape, an ever changing environment and an increasingly educated and demanding clientele.

This has led some of them to diversify into related services. Stash, for one, has launched a personal banking service, which is now in beta for its existing clients.

Acorns has partnered with Paypal to let Paypal’s US customers save and invest through Acorns’ app integration. In July 2017, Acorns signed a partnership with personal finance app Clarity Money and its 600,000 customers.

While such partnerships which are not uncommon in the space, make sense from an economic perspective for all parties involved, they might not be enough to keep digital wealth companies afloat in an ever more tech-intense market.

Going forward, some suggest that the next-generation advisors might enter customers’ homes integrated with one of the voice assistants that have gained popularity in the past years. Products like Alexa and Google Home are quickly becoming a preferred method for web searching and fulfilling simple tasks using voice commands. While they still lack the capability to handle complicated operations like executing trades and managing investments, that may still be the case.

“With machine accuracy equal to the threshold of human accuracy, investors can trust voice controlled advisors as much as humans. Paired with general AI, customized investment execution could be next”, CB Insights points.