In the past few years, startup robo-advisors have reached new customer demographics with low-cost, automated investment portfolios. However, incumbents have caught up fast with similar products, surpassing the managed assets of their unicorn competitors in less than a year.
For young, inexperienced investors, the robo-advisor has emerged as a foolproof approach to wealth management. By using a short questionnaire to determine risk tolerance, robo-advisory firms like Betterment, Personal Capital and Wealthfront set up automatically managed portfolios for their clients.
$2.2 Trillion at Stake
Most robo-advisors follow a passive investing strategy, where asset allocation is more important for long-term returns than choosing individual stocks. They build simple portfolios of diversified, low-cost ETFs from Vanguard and Charles Schwab. With lower labor costs, robo-advisors are able to charge low fees: around .25% of assets, compared to 1-2% of assets for traditional advisors.
It is hard to ignore the robo-advisor’s growing popularity; analysts at Deloitte, CitiGroup and AT Kearny predict digitally managed assets to grow from $300 Billion to $2.2 Trillion dollars between now and 2020. Not surprisingly, all of this hype has led to an overcrowded robo-fest, and it appears the existing players are positioned to take the biggest pieces of this $2.2 Trillion dollar pie.
Incumbents Fight Back
Robo-advisor startups have focused on two things: customer acquisition and simpler, more intuitive UX design. The most well funded of these startups, Betterment, Wealthfront and Personal Capital, are all considered tech “unicorns.” While these unicorns pioneered the robo-concept first, analysts have noted since their inception that their UI and customer acquisition wouldn’t take long to replicate.
Unfortunately for the unicorns, big boy incumbents caught on fast, launching their own robo-advisors or acquiring smaller ones. Charles Schwab launched Schwab Advisor Services in 2015, which grew to $5.9 billion in nine months, surpassing the two largest unicorn robo-advisors combined. Vanguard’s Personal Advisor Services now controls $17 billion, and Fidelity is launching its own robo-advisor, Fidelity Go, this year. BlackRock has taken a different approach, acquiring robo-advisor startup Future Advisor in 2015.
Trouble Ahead for Unicorns
As the incumbents have caught up, they have driven up the cost of customer acquisition, forcing unicorns to spend an unsustainable $2000 per acquisition. To add to their troubles, unicorns rely on incumbents for investment vehicles, custody & cleaning services. Even Wealthfront & Betterment clients pay management fees to giants like Schwab and Vanguard, who issue the ETFs in their portfolios. As their existing customers mature and build wealth, their investment needs will become more complicated. When this happens, customer retention will be the unicorn’s greatest challenge.
On the other hand, the big incumbent players in the robosphere rest comfortably on more profitable wealth management offerings. As such, their robo-advisors act as an onboarding program for their more sophisticated product offerings, even if they do not generate outrageous profits on their own. Schwab has not seen their existing business decline since launching their robo-advisor; instead, they’re eyeing a massive cross-sell opportunity down the line.
Looks like the big boys aren’t going down without a fight.