Robo-advisory solutions were pioneered a decade ago by FinTech Wealthfront and Betterment, which used algorithms to pick low-cost investments suited for a customer's risk appetite. Mutual fund giants including Vanguard and BlackRock soon released their own versions, and banks with sizeable wealth management arms like Morgan Stanley and Bank of America followed suit.
Americans already used to be investors but robo-advisors have permitted to reach new categories of people, less wealthy and more digital friendly. 60% of current robo-advisor users are Millennials, who are expected to have $20tr of assets globally by 2030 [1]. Additionally, nearly 60% of US consumers expect to use a robo-advisor by 2025 [2]. As that wealth grows, more money will likely flow into digital wealth managers, especially as they often offer such services at a cheaper price than incumbent wealth managers.
Where Europeans are struggling to survive, US robo-advisors are fighting to conquer a mature and not yet saturated market.
A developed market with growth potential
Numerous studies have tried to estimate the assets managed by digital advisors. If some value it up to $1tr, most of consultants agree that the global market is around $400-500bn. S&P Global Market Intelligence estimates that it will grow to $450bn in 2021 (up from $100bn in 2016); Backend Benchmarking says $440bn is managed by robo-advisory services as of mid-2019; Aite Group says it’s in the $350bn range. But all of them agree that the US market represents approximately 3/4 of the total amount.
The other attribute of the US robo-advisory market is its momentum. After a 15% growth rate in 2018, it grew 10% over the first three quarters of 2019 [3]. And several factors suggest that the trend could accelerate:
- The entry of large incumbents in the digital service arena, accelerating the dynamism of this space and its impact on the wealth management industry: JPMorgan and Goldman Sachs announced the launch of a digital wealth management services for 2020.
- The migration of "digitally viable assets" managed by large financial institutions — one-quarter of the assets in accounts with less than $1m — to their robo-advisors, even spending up the digitalization of full-service wealth management, which is already the fastest growing segment of the digital advice market, although it only represents 8% of assets.
- Client demand for digital investment tools, driven by brokerage platforms’ clients who are looking for low-cost portfolio management and adjacent services, such as financial planning. The discount brokers already control 35% of digital assets, led by the $43bn in assets on Charles Schwab's Intelligent Portfolios (which is up +29% since 2018). Thus, zero-commission trading will be a boon for the robo-advisers offered by discount brokerages.
Incumbents and Fintech in competition
Vanguard Personal Advisor Services already dominates the hybrid robo-advice space with about $140bn in AuM, though the majority were brought over from existing Vanguard accounts.
Just after Charles Schwab’s Intelligent Portfolios, Fintechs account for 16% of digital assets, or $45bn. The five biggest companies — Betterment, Wealthfront, Personal Capital, blooom and Acorns — collectively manage 89% these assets. And new actors entered the market during 2019; for example, John Hancock's Twine grew +14% in the first three quarters of 2019 and reached the $1bn AuM milestone.
Wealthfront is increasingly positioning itself as a viable threat to incumbents. It now holds $20bn in AuM, nearly the double of the amount holding at the beginning of the year. Wealthfront offers users access to a variety of investment options, including Traditional IRA, Roth IRA, SEP IRA, and 401(k) Rollover. It allows users to select what they want to save money for, such as retirement, travel, or home ownership, and offers advice on savings targets and investment strategies.
Wealthfront is succeeding at a time where incumbents struggle to meet consumer demands with their digital wealth management products, and this lowered competition from incumbents will only boost the Fintech's future chance of success.
The race for size to achieve profitability
A HSBC report stated that robo-advisors in the US need to manage between $11.3bn and $21.5bn in order to operate a break even business (with an assumed management fee of 0.25%). The only two robo-advisors who have reached this scale are Betterment and Wealthfront. The report estimates the revenue per employee at Betterment is $154,000 and $151,000 at Wealthfront. They contrast this with the costs per employee at Charles Schwab and BlackRock which are $157,000 and $290,000 respectively.
As a confirmation, Betterment CEO recently announced that the company is now profitable.
But the Fintechs must spend much more on marketing costs to compete with nationally recognized brands for which client acquisitions cost is low. They should be able to maintain existing market share, but future growth could be more difficult.
Price, technology, innovation and service will be the keys of battle.
Price wars
Charles Schwab was the last to witness the digital platform war that has been raging on the market since the rise of passive management, formalizing the acquisition of TD Ameritrade in November (for $26bn), after announcing a few months earlier that it was eliminating all fees on equity and index funds. This price decline forced its competitors – including TD Ameritrade and E*Trade – to align, leading to a significant fall of their turnover, much more dependent on commissions than Charles Schwab's.
With this acquisition, Charles Schwab will almost double the number of customer accounts, from 12 to 24 million, increase its assets from $1,300bn to $5,000bn and its turnover from $5bn to $17bn. The company also anticipates around $2bn in cost synergies.
Earlier this year, Charles Schwab introduced a new pricing approach, similar to the flat-rate model of Internet and mobile providers. ‘Intelligent Portfolios Premium’ charges a flat $30 monthly fee, after a one-time $300 fee for unlimited one-to-one guidance from a certified financial planner and a comprehensive financial planning. The service requires a $25,000 minimum, and provides access to a mixed of over 50 ETFs from Schwab and other asset managers plus access to an FDIC-insured deposit at Schwab Bank.
This new digital advisory service was a big hit, attracting $1bn in new AuM in less than 4 months. It has also seen a 25% increase in account openings, a 40% increase in average household assets enrolled and a 37% rise in new-to-Schwab household enrollments.
To compete with this pure digital offer, Vanguard is about to launch its ‘Digital Advisor’, an alternative to its ‘Personal Advisory Service’, more affordable and aiming a greater number of investors. While PAS requires a $50,000 minimum investment and charges a 0.30% annual management fee, Digital Advisor account could be opened with just $3,000 and pay a 0.15% management fee. It does not include support from a human adviser, but Vanguard's filing with the U.S. SEC indicates that the company is developing a goals-based platform to help clients create a strategy they will stick with.
Even with the cost of the underlying Vanguard ETFs pumping the all-in cost up to 0.20%, Digital Advisor still presents a cheaper alternative to other purely digital advisers on the market such as Wealthfront and Betterment.
On its side, JPMorgan unveiled last year ‘You Invest Trade’, a companion service that includes unlimited free trades for preferred clients. On the day it was announced, the news wiped out more than $5bn from the total market capitalization of online brokerages including Ameritrade and E*trade.
More recently, JPMorgan released a digital investing service called ‘You Invest Portfolios’, which put users into an investment portfolio made up of the bank's ETFs, for an annual fee of 0.35% of assets. That fee is in line with what competitors – Morgan Stanley or Wealthfront – charge for similar services, but unlike most rivals, the bank is waiving fees for the underlying investments. The ETFs JPMorgan will use range in cost from about 2 to 50 basis points, and users will typically save an average of roughly 15 basis points in fees through the service.
Innovation and services as winning tools
But, just being the cheapest option on the market is not going to be enough to win consumers in the mass market space. According to ParameterInsights' research, while fees are important, they matter less to consumers than minimum account requirements and branding when making an initial investment in a robo-adviser. The research states that “the battleground is how these firms engage with consumers”.
Incumbents and Fintechs have carried out different strategies to lure new clients and gain a competitive edge:
- Incumbents
They benefit from the strength of their brand, a low acquisition cost and a recognized quality of service in wealth management. But with a limited customer base, they are looking to develop more accessible services to reach a broader target, including smaller savers, and catch up on technology.
Beyond the price wars, the new releases from Schwab, Vanguard & JPMorgan and the lowering of subscription thresholds constitute the manifestation of their willingness to deliver scalable advice and planning to clients who have tens of thousands of dollars in investable assets. Thus, technology lowers the barrier for many consumers that would benefit from financial planning by making it very easy to understand from a service and pricing perspective. Doing this, incumbents are facing a new hurdle: learning how to segment the practice for planning and investment advice outside the AUM model.
- Fintechs
They have proved their technology leadership and tend to get more innovative and creative with the tools they create. John Hancock's Twine, with its built-for-couples smart savings app, is an example of this creativity. But to survive, they will have to push forward their business model, as they did in 2019 by adding checking and savings features and services like financial planning, hybrid advice and banking offerings.
For instance, diversifying its offering helped Wealthfront to accelerate the growth of its assets under management. In February 2019, the company rolled out its high-yield-savings-like account offering with an Annual Percentage Yield on all balance tiers 0.3% higher than Goldman's ‘Marcus’ saving account. In the future, Wealthfront is aiming to expand its traditional banking offering with direct deposits, bill payments, and a debit card.
In any event, experts estimate that the pool of investable assets seems to be large enough for everyone, pure players and digital services emerging from traditional wealth management players.
And elsewhere?
US robo-advisors’ business is thriving, at a time when a number of robo-advising offerings are failing in Europe. Earlier this year, Investec announced that it would shutter its platform ‘Click and Invest’, ABN Amro also closed down its digital wealth manager ‘Prospery’, which failed to attract sufficient clients, and UBS already discontinued its ‘SmartWealth’ pilot program in 2018. In France, Marie Quantier abdicated during the summer.
With a volume of about €14bn in AuM, the European market is relatively small and roughly equals the size of the fifth-largest US robo-advisor. The UK is the largest market with €5.5bn, followed by Germany with about €3.9 bn. And only Scalable Capital and Nutmeg have reached the billion-euro mark (≈€2bn).
Several factors could explain this situation:
- Apart from the UK, Europeans are more ‘savers’ than ‘investors’, with a marked risk aversion;
- Effectiveness of pension systems have not created a long-term savings culture;
- In contrast to the US, where a robo-advisor is able to address the whole population, European ones need to “passport” the service in each country and manage agreements with local actors in life insurance and bank accounting.
To survive,robo-advisors have started to move their model towards a ‘robo-for-advisors’service integrated with existing banking offerings.
In Asia, the robo-advisory landscape remains nascent compared to its western counterparts. However, Fintech firms have continued to launch robo-advisories in the region, and both fund firms and wealth managers are exploring the platforms.
Fund managers, especially ETF providers, view them as an additional channel for distribution, while a number of wealth managers have entered into B2B partnerships with robo-technology providers to diversify advisory offerings.
Singapore and Honk Kong appear as exception in the region, with the demonstrated willingness of respective regulators to develop the robo-advisory industry. User penetration rates in these two markets are expected to triple over the next four years, with significant increases to AuM [5].
As for China, the domination of e-Wallet providers – Alipay and WeChat Pay – have locked the market and limited the entry of new players and solutions. They are likely to offer robo-advisory services quickly on their wealth management platforms (Ant Financial’s Caifu Hao and Tencent’s Licaitong). That’s why Deloitte forecast a sharp market rise in the next few years, expecting the AuM to double every year until 2022.
Author: Pascal Buisson - December 2019
[1] Source: CB Insights - [2] Source:Charles Schwab - [3] Source: Aite Group - [4] Source: Wealthfront's founder and Chief Strategy Officer, cited by Business Insider - [5] The rise of robo-advisers in Asia Pacific –Deloitte 2019
