Beyond robo: How will asset managers navigate the future of digital advice?

With new big players set to enter the scene and incumbents focused on growing hybrid offerings, the sector is evolving at pace

The recent shuttering of a UK robo-adviser, consultants said, came for reasons that point out the threats and opportunities for asset managers looking to tap the digital advice space in the United States.

Investec, a London-listed bank and asset manager, announced in May that it was pulling the plug on its money-losing Click & Invest digital advice service. The closure came less than a year after UBS discontinued its own UK robo-adviser, Smart Wealth. “Very quickly, they found out that they weren’t attracting any clients’ assets whatsoever,” said Mike Barrett, consulting director at The Lang Cat, a UK consultancy.

The US market, by contrast, looks rather different, according to industry observers. Some of the leading robo-advice startups, launched several years ago, have long since discovered the hurdles to acquiring clients profitably and are now turning toward new sources of revenue. To the incumbent asset managers, discount brokerages and full-service wealth management firms, meanwhile, launching a robo-adviser can be less about bringing on new clients than distributing products to existing customers.

What this means, experts suggested, is that incumbent firms yet to roll out their own digital advice platforms are likely to do so, and more independent robo-advisers that cannot find a route to profitability will probably be acquired or fall by the wayside. Hybrid robo-services, where investors pay extra for access to a human adviser, are touted as both a way to tap previously underserved client markets and a means of wringing potential profits from the digital advice realm.

And while the biggest of the incumbent players, such as Vanguard and Charles Schwab, seem to have an advantage in their sheer scale, independent robo-advice firms are stealthily challenging the status quo by introducing bank-like offerings that may one day aim to capture investors’ income streams at their source.

“This is speculative, but I think there are companies out there who have their eye on getting at the very mouth of allocation,” said David Goldstone, research analyst at Backend Benchmarking, which publishes a quarterly report on robo-advisors. “Give them your paycheck and they’re going to help you cut it up into all your different buckets: your savings, your fixed expenses, your emergency savings, your long-term investments, and your cash.”

Direct-to-consumer digital investment assets under management rose 15% in 2018 to a year-end total of $257bn, according to a recent report by Aite Group. The consultancy projected that the digital advice market could “conservatively” reach $524bn by 2023, with a total of $1.26trn also “realistic.” JPMorgan Chase is poised unveil its robo service, You Invest Portfolios, sometime this summer, and HSBC is expected to follow later this year. Goldman Sachs has said it is eyeing the market, as well.

Growth in a hybrid approach

Vanguard’s Personal Advisor Services currently ranks as by far the biggest digital platform. As of March 31, 2019, it had $130bn under management, a spokesperson for the indexing giant said. In an emailed statement, the spokesperson emphasized the hybrid nature of the service. This hybrid approach “is resonating with investors facing growing complexity with their personal financial situation, who are seeking ….  expertise they gain through a powerful combination of cutting-edge technology and knowledgeable advisors,” the statement reads.

Vanguard continues to invest in the service, the spokesperson noted, including by recently adding a tool that helps predict a client’s future health care costs.

If the robo-advice market is crowded, the hybrid advice market looks to be getting that way. In June, Bank of America Merrill Lynch rolled out a hybrid option, which will be one step up from the bank’s digital-only Merrill Guided Investing service. “Hybrid is the name of the game,” said Deloitte lead wealth management consulting partner Gauthier Vincent.

There are two business models for digital advice, Vincent said. The hybrid robo-human approach especially fits a model where value-added advice is not a loss leader but carries its own fees and should be profitable in itself. The other model, he said, is offering advice for free, trying to differentiate based on the customer experience, and getting paid somewhere else. “Some of the largest asset managers are playing that game because they know the automated solution will drive volumes through their own funds.”

Charles Schwab’s Intelligent Portfolios, the second-biggest digital platform—it has $39bn under management, according to the company—offers hints of both models. Schwab made waves in March when it switched from an asset-based fee to a flat monthly subscription fee for its hybrid service, renamed Schwab Intelligent Portfolios Premium. “That may have been a look at: how do we make each individual profitable,” Backend Benchmarking’s Goldstone said. The digital-only version, Schwab Intelligent Portfolios, continues not to charge an advisory fee.

Asked whether Schwab sees digital advice more as a profit center in itself or as a way of distributing products, Cynthia Loh, vice president of digital advice and innovation, said, “We’re thinking about how we can solve for investor needs, making it possible for more Americans to have access to financial advice and innovation.”

Technology will be crucial to that effort, suggested Loh. “It’s not really about being the best in financial services anymore,” she said. “It’s about being the best consumer experience overall.”

Among independent advice startups, Personal Capital, which boasts $10m in AUM, has been built around a hybrid service since its public launch in 2011. It’s also cited by observers as an example of how insurgent advice firms are dipping their toes into bank-like services as they look to compete with established financial services titans. In June, Personal Capital announced a new high-yield savings account, along with a new tool to help clients boost their savings.

“We want to continue having a holistic approach with our clients,” said Kyle Ryan, EVP of advisory. “And we’re going to continue to do that by offering more and enhanced financial planning solutions. We’re going to continue to look for solutions that we think can help our clients.”

After Vanguard and Schwab, the biggest digital platforms to disclose their assets are Betterment ($13.6bn as of year-end 2018) and Wealthfront ($11.4bn), followed by Personal Capital, blooom ($3bn), E*Trade Core Portfolios ($5.4bn), BlackRock FutureAdvisor ($1.2bn) and Acorns ($1.2 billion), according to Aite Group’s report.

What’s really driving all these firms is the desire to own that entire relationship, and not just through aggregation features

The consulting firm estimates that full-service wealth managers accounted for a combined $19bn at the end of 2018, including $927min John Hancock’s Twine platform, but the likes of UBS, Morgan Stanley and Wells Fargo had yet to reveal assets for their digital wealth management platforms.

Goldstone pointed out that fintech firm SoFi, known for its student loan refinancing, now offers its own ETFs and high-yield cash management account, and is “aggressively pushing into investing,” including with its own hybrid advice service. Betterment and Wealthfront also offer cash accounts. Acorns and Stash offer debit cards.

Jen Butler, director of brokerage research at Corporate Insight, uses the term “bankerage” to describe how these fintech firms are broadening their product ranges. “What’s really driving all these firms is the desire to own that entire relationship, and not just through aggregation features.  The startups do a really good job because they are just more agile. That doesn’t mean that the incumbent firms aren’t wise to this.”

Schwab’s Loh, herself a Betterment alum, welcomed any way to bring advice to more people. “Disruption and innovation in the financial services space from any player is is a good thing,” she said. “Our advantage is scale. We can apply very scalable changes across a very broad client base with our existing infrastructure.”

Future disruption

Still, with Facebook recently entering the digital currency space, the notion of technology companies upending the financial system has moved a bit closer to reality. “We should not underestimate the hurdles that the big technology firms will have in terms of establishing themselves as a financial brand,” Deloitte’s Vincent observed. “That said, I still believe it will happen.”

The standalone robo-advisers with the best chance to survive, Vincent said, have found a lower-cost way to acquire clients by white-labeling their services to other firms. For financial services firms, whether partnering with robo startups or building their own systems, digital advice provides another channel for cross-selling in and out of, he said, to clients who previously did not have enough assets for advice. And while most of the consolidation took place a few years ago, others may go the way of Click & Invest. “It’s like a game of musical chairs,” Vincent said. “Some of these platforms are going to fail.”

Longer term, as hybrid services proliferate and tools for financial planning as well as “bankerage” options keep getting bolted on to digital platforms, the term “robo-adviser” could become obsolete. “I think it’s going to disappear,” Vincent said. “You’ll call it digital advice or automated advice. For a lot of people robo means strictly digital and it’s a very narrow scope, it’s advice around the shape of your portfolio. As you go to a hybrid model, the scope is much broader.”

Another question is how robo-advisors, or whatever digital platforms are called, will withstand a potential downturn. “They’ve never really had to deal with a recession,” Butler said. “So is there longevity? Will they hold onto those assets once their customers are seeing their total gains disappearing?”