“Robo advisors,” the name give to software that provides savvy investment advice, are on the march. The first half of 2015 saw an acquisition in March of Learnvest by Northwestern Mutual, and the public rollout of both Vanguard’s Personal Advisor Services and Charles Schwab’s Intelligent Portfolios.
Large firms in the wealth management industry have increasingly focused efforts on developing and acquiring the right technology and capabilities to compete. Established players like Vanguard and Schwab may be far ahead in asset accumulation (capturing at least $20 billion in assets), but new entrants such as Wealthfront, Betterment, and Personal Capital have all grown their assets under management by 45% or more in the first seven months of the year.
Although the use of robos has seen exceptionally fast growth within and outside the U.S., it is important to remember that these asset numbers are still relatively small in comparison to the full size of the wealth industry. And new “robo advisor” providers are still primarily targeting accounts in the mass market and mass affluent segments currently, with average client assets at the firm ranging from $35,000 (Betterment) to $300,000 (Personal Capital).
Robo advisors are not anywhere close (yet) to replacing an advisory relationship with a human being, especially a human advisor who provides digital services that complement all the human interaction. As one member of CEB’s network of wealth management execs says, robo advisors are really neither robots, nor advisors, but rather “electronic portfolio managers.”
Reasons to Respond
Low baseline numbers do not mean that wealth firms can safely ignore these start-ups. Robo advisors share a common element in their marketing and value proposition, which clients of all segments care about: namely, the price they charge.
By pairing simplified financial guidance through online and mobile channels with portfolio management capabilities like automated rebalancing and tax loss harvesting, these providers offer fee levels from 0.89% (for Personal Capital’s combined phone-based financial planning and online capabilities) to zero (for the first $10,000 invested with Wealthfront).
The combination of easy-to-use online account access and helpful tools, and a low price point creates a compelling need for wealth firms to show why their more expensive services represent good value, rather than a race to the bottom on price.
Specifically, this means continuing to build holistic advice capabilities, which CEB research shows are the strongest way of guaranteeing of client loyalty. As more than two-thirds of high net-worth clients use online channels frequently to manage their finances, this also means wealth firms must continue to develop online and mobile capabilities that measure up to what the new entrants are offering.