Fintech robo advisors are blanketing the financial landscape — the robo advisory market is expected to reach between $2.2 trillion to $3.7 trillion in assets under management by 2020 and $16 trillion by 2025.
Yet, robo advisors aren’t a uniform investment management solution and vary among companies.
The drivers for this financial explosion are investment strategies based on Harry Markowitz’s Nobel prize-winning modern portfolio theory and investment management priced at a fraction of typical financial advisory fees. Legacy investment management fees of 1.5 percent have dropped to zero with many robo advisor platforms.
“Robos is a term thrown around loosely and seemingly attached to firms with very different capabilities,” says Blake Wood, senior vice president and director of product strategy at Envestnet, a provider of technology solutions to financial advisors. Simply, a robo advisor is an online service that provides automated investment portfolios based on your risk tolerance level, time horizon and goals.
[See: 9 Things to Know About Robo Advisors.]
Now 10 years old, the robo advisory field is exploding with various investment strategies, services and integrations with human advisors. Here are some trends and disruptions shaping the industry.
The hybrid model of human plus robo advisor is taking over. Human financial advisors are being added to formerly tech-only robo advisors at lightning speed as consumers demand more guidance. The list of robo advisors with human advisor access includes Personal Capital, Betterment, WealthSimple, Ellevest, Vanguard, SigFig and TD Ameritrade.
On the flip side, human financial advisors are adding robo advisors to their services to speed up onboarding and asset selection. The marriage of robots with humans provides greater business opportunities for existing robo advisors. Jemstep Advisor, formerly a B2C robo was acquired by Invesco in 2016 and began the trend of business-to-consumer digital investment advisors moving toward a business-to-business model.
“Increasingly we are seeing robo advisors providing their platforms to larger financial services organizations on a license basis,” says Tobias Henry, managing principal at Capco, an international technology consultancy to financial services. This provides a quick route to market for advisors and a proven platform for the incumbents to open a new revenue stream and attract younger clients without impacting their current operating model.
Benjamin C. Halliburton, chief investment officer at Tradition Capital in New York, launched the BuildingBenjamins.com robo advisor. “All wealth advisors need to offer some sort of robo to improve the customer experience, reduce costs and provide better education,” he says. The industry is poised for disruption as clients continue to examine the price of investment management separately from planning, Halliburton says.
It’s likely that in the future, robo advisors without access to advisors will falter as consumers demand a human financial guide.
There might be a ceiling on the robo advisory clientele. Anthony Stich, COO at Advicent, a financial technology provider to advisors based in Milwaukee, warns against a “robo threshold” — when customers exit the robo-only platform and move to a traditional advisor. This will put additional pressure on robo advisors without human advice for high net-worth clients.
The trend toward lower and zero investment management continues. The race to the lowest fees will squeeze unaffiliated robo advisors without diverse income streams. WiseBanyan, Schwab and M1 Finance all offer free investment management within their platforms. Next, the lower management fee robos like Betterment and Wealthfront come in with aggressive pricing on asset management and are changing the consumers expectations, Halliburton says. This race to the bottom is putting the squeeze on the entire financial management industry as evidenced by falling investment management fees across the board.
[See: 7 Robo Advisors With a Human Touch.]
The move beyond basic stock and bond index ETFs is exploding. From active management to niche assets, robo advisors are tapping into every corner of the investment market. BuildingBenjamins.com provides “unique wiser diversification that moves the efficient frontier up and to the left.” That means investors can invest with higher expected returns or lower expected risk. It offers interval funds with exposure to private real estate, timberland, infrastructure, alternative lending, reinsurance and other unique asset classes.
Independent robo advisors with hedge-fund type investing include Qplum, M1 Finance and Hedgeable. Going forward, instead of paying enormous fees for sophisticated investment strategies, the average investor will have multiple options to diversify their strategies beyond the vanilla passive management robo-advisor.
Jim Lee, founder of StratFI, a Wilmington, Delaware-based wealth management firm, says popular investing factors will be co-opted by the robo advisors, with a twist. Factors investing such as smart beta ETFs, value, momentum and other factor styles go in and out of favor. The newer strategies actively switch between factors, depending upon market expectations. The robo-advisors will add these investment strategies that blend active management with algorithmic enhancement to traditional index ETF investing.
In the future, robo advisors will need to become more transparent. Some digital platforms are the bastion of transparency with access to lists of funds and investment strategy whitepapers. Other robos’ funds and investment strategies are opaque.
“There is no industry standard regarding the level of transparency needed. Some firms still choose only to disclose general products and services information without any relevant details. Over time, these investment firms will need to become more transparent due to increasing customer expectations,” says Roi Tavor, co-founder and CEO Nummo in Zurich, Switzerland.
[See: 7 Robo Advisors for Sophisticated Investors.]
The lines will blur among registered investment advisors and robo-advisory platforms. New investment management offerings for advisors such as the comprehensive ADVIZR platform will give financial advisors massive capabilities, says Will Trout, head of wealth management research at Celent, a Houston research, advisory, and consulting firm focused on financial services technology. As a barrier to the commoditization of robo advisors, the newest and future platforms will aid financial advisors with both personalized advice and better fintech services.
Automated services will expand beyond investing to sophisticated retirement planning, insurance planning, retirement stress-testing, Social Security optimization and tax strategies.
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6 of the Newest Trends in Robo Advisors originally appeared on usnews.com
