The Robo-advisor industry grew out of the market collapse in 2008-2009. With Wealthfront and Betterment leading the way, over US$4 trillion has since been invested in ETFs – the main underlying asset of Robo-advisors – as of September 2019; a 190% increase from 2015.
Designed to provide an experience that enables trust and empowerment, the Robo advisor curates portfolios that appeal to investors of all ages. Using algorithms to automate portfolio allocation, investors could access diverse asset classes and market sectors tailored according to their financial goals.
In a report by Charles Schwab, the number of users using robo-advisory services is expected to grow from an estimated 2 million in 2018 to 17 million by 2025. However, this is just the tip of the iceberg.
Customer-centric Wealth Management
Boston Consulting Group’s report highlighted how retail banks traditionally focused on a product-first sales approach, rather than letting the specific needs of individuals dictate their commercial offerings and outreach. This has since created a gap where the mass affluent (AuM <$1M) segment has been neglected and underserved (Figure 1). This presents a potential for revenues and the number of clients to grow as robo-advisors step in to fill this gap.
Figure 1 (Source: Boston Consulting Group, 2019)
“Winners in the wealth management arena will accelerate product innovation and develop offerings that address the specific needs and preferences of affluent subsegments,” – Boston Consulting Group.
It is no surprise that over the years, several big players have jumped onto the Robo-advisor party by launching digital advisory services through in-house offerings, acquisitions and partnerships.
The Financial Giants
Schwab Intelligent Portfolio, introduced in 2015, was Charles Schwab’s very own Robo advisor.
The Schwab Intelligent Portfolio is a pure Robo-advisory service. 53 ETFs for investors to choose from- each one hand-picked by the experts at Charles Scwab. Just like any Robo-advisor, the platform will monitor and periodically rebalance the portfolios. If situations deem to be risky, then the Robo-advisor has the power to halt the trade.
Additionally, Charles Schwab introduced Intelligent Portfolio Premium, a hybrid Robo-advisor model. Complimentary with the aforementioned services, Intelligent Portfolio Premium offers a free consultation with its experts for guidance and planning. It acts more as an add-on to the existing Schwab’s Intelligent Portfolio with a monthly subscription fee.
BlackRock, a global wealth management corporation, acquired FutureAdvisor in 2015. Unlike other players in the industry, BlackRock did not plan to target individual investors.
Instead, the company aims to enable other banks, brokerage firms, and insurers to use their platform to serve clients. It hopes to position FutureAdvisor as a Robo-advisor solution for advisors.
With FutureAdvisor, financial institutions can either offer a pure advisory service or a hybrid Robo-advisor model, whichever fits best. BlackRock is giving smaller wealth managers and RIA a solution to stay afloat in the competitive marketplace- giving them access to the same technology that big players are offering to clients.
“Everyone talks about how robo-advisors can’t connect with clients; I believe that those kinds of tools are like ATMs. We are all going to have to have it” – Larry Fink (BlackRock’s CEO)
Within that same year- 2015 – Vanguard also joined the Robo-advisory scene. The company launched ‘Personal Advisor‘, a hybrid Robo-advisory service, prides itself on ‘lower than industry’ service fees.
Consultation with a financial advisor is readily available to clients on an ongoing basis, even from the very first touchpoint. In comparison to other Robo-advisory services, a financial advisor will facilitate clients’ onboarding process and assist in the development of their financial plan. It doesn’t stop there. Together with the Robo-advisor, the financial advisor will monitor the client’s portfolio and rebalance it if necessary.
Seeing the success of their hybrid Robo-advisor service, in 2017, Vanguard rolled out another one- The Digital Advisor. For clients who prefer to make their own investment decisions, this one’s for you. Digital Advisor is a pure Robo-advisory service at your fingertips- no human intervention- just you and the technology.
Advisors Managed Portfolio, a “digital portfolio with a human touch”, was one of the later editions to the Robo-advisory industry. The service offers clients access to a financial advisor throughout the investing process. Meanwhile, the Robo-advisor will take the baton and bring your portfolio to the finish line.
Just 3 years later, Capital One Acquired United Income. A pure Robo-advisory service is specializing in retirement plans. Nearing retirement or already in retirement? Then this service is the one for you. The service will assist investors in finding the best ways to manage their wealth. All this at the comfort of your home.
Bank of America-Merrill Lynch
Merrill Guided Investing is a hybrid Robo-advisory service offered by Bank of America-Merrill Lynch. First introduced in 2017 and later modified in 2019. Like any other hybrid Robo-advisor model, clients get to experience the best of both worlds- the combined power of technology and expertise from the financial advisors.
With Merrill Guided Investing, clients will receive guidance from the chief investment office (CIO) of Bank of America-Merrill Lynch. The CIO will monitor the client’s portfolio to ensure they stay on course even during the most volatile time. Markets are assessed regularly using a disciplined approach and adjust strategies accordingly.
“In that whole continuum, there was one piece our clients pointed to that was missing: The mass affluent client who enjoys technology, who leverages digital, but who wanted some guidance and advice in terms of holistic financial planning. This allows clients to leverage that platform but still access a financial advisor.”– Aron Levine (Bank of America-Merrill Lynch’s Head of Consumer Banking and Investment)
The Intuitive Investor Program is a Wells Fargo Advisors offering for consumers who prefer to manage their finances. A combination of algorithm-driven technology and financial expertise.
Wells Fargo Investment Institute has built nine portfolios for the Intuitive Advisor Program- each seeking to provide an optimal return at every risk level. Based on the client’s profile, the Robo-advisor will invest in one of the nine portfolios. Are you missing the human touch? Rest assured, Wells Fargo’s team of financial advisors is available through the phone to assist clients with any inquiries. Truly a Robo-advisor experience with a human touch.
Morgan Stanley was one of the later corporations to join the Robo-advisory industry as compared to its competitors. Launched at the end of 2017, Access Investing added its twist to the typical Robo-advisory framework.
The Robo-advisors perform their function as per usual, but here is where the twist comes in. Morgan Stanley has created a set of themes and portfolios for investors to choose from. Investors get to pick and choose the theme or portfolio that best suits their interests.
Some themes or portfolios are but are not limited to climate action, defence and cybersecurity, data and AI, gender diversity, and emerging consumers. With this, you can invest in what you love.
JP Morgan Chase is one of the largest banks in America, known for serving ultra-high net worth clients. However, in 2018 the company decided to launch “You Invest” a Robo-advisory service for the mass affluent.
You Invest positions itself as a people-centric investment platform. Just as the name may have suggested. Everything is about you, and you make all the choices. To fully support this stance, the company has decided to offer it a pure Robo-advisory service with little to no human intervention.
So What’s Next?
Over the last 12 years, the Robo-advisory industry has grown significantly.
However, with 80% of mass affluent Americans lacking a financial advisor – holding approximately US$7 trillion of wealth – the race is on for wealth managers.
The importance of digital transformation has never been more critical. – it has gone from ‘we’ll go digital someday’ to ‘we have to go digital today’.
Robo-advisors have since evened out the playing field. Solutions like Bambu Build, a fully customizable wealth tech platform, allow anyone to have a seat at the table with these big players.