As more and more younger investors are embracing robos and ETFs vs. actively managed portfolios, the dollars being invested are shifting. As we look ahead to where the assets are going, it’s impossible not to wonder what this means for the economics of the investment firms, asset managers and brokers. ETFs are growing and they’re also a lower cost investment vehicle. Schwab’s annual report is a great example of how assets are flowing into lower cost investment options (ETF growth is booming – up 19%) and the number of client accounts continues to grow (more on that later). But while it’s always good to see growth, and great to know people are investing (!), does this mean there’s a reset coming as it relates to the fees generated (or not) by investment products?
For large incumbents there’s a cushion, because they’re more diversified as it relates to product offerings, and in turn, revenue streams. But with the shift to a lower cost product like ETFs, and the combination of Millennials pouring money in and Boomers pulling money out, there’s less investing in traditional mutual funds, creating a shift in how incumbents need to think about their revenue streams. And while these companies are seeing gains, with Schwab’s stock price up over a 10 year period, what does this mean for their long term offerings and strategy?
Vanguard is currently king of the robos with $101 billion in AUM, roughly half of all robo assets. In addition to their command of the market, they also see a bump since they serve as the low cost ETF provider to Betterment and Wealthfront. The fees from distribution through these channels translate to more additional revenue for Vanguard.
Schwab is sitting comfortably at number two, with $27 billion across its robo platforms. But the pure-play robo startups, while not in the same hemisphere, are currently holding their own. Betterment and Wealthfront have $13+ billion and $10 billion in AUM, respectively.
According to a recent report by PricewaterhouseCoopers, experts estimate that robo-advisors could see their AUM increase by over $800 billion over the next five years as they continue to plow investors’ money into ETFs. And A.T. Kearney estimates that digital advice could grow to over $1 trillion by 2020, a 68% increase over current levels.
Who Is Driving Growth?
It’s no secret that Millennials are heavily investing in ETFs and mostly via robos. As we’ve talked about before, it’s a low barrier to entry vs. mutual funds or advisory solutions and investors at this age simply have less assets. But interestingly, new findings of emerging Canadian robo-advising companies describe a higher-than-anticipated demographic of baby boomers and Generation X clients with 44 being the average age of clients. Part of this rapid growth in AUM is due to older clients with larger retirement savings.
However, according to LendEDU.com, American Millennials are distrusting of robo-advisors, with many stating they still prefer traditional advisors. In addition, a large proportion of millennials who don’t use robo-advisors haven’t heard of them, showing that robo-advising has yet to penetrate the Millennial market.
And while Gen X and Boomers might be investing in ETFs, the majority of them and their dollars are invested in mutual funds and/actively managed portfolios. These represent greater asset volumes and are also higher cost products.
Will there be a pendulum shift?
It does appear that way. As older generations move into retirement and withdraw funds, the AUM in traditional mutual funds, actively managed portfolios and among advisory solutions will decline. But, because younger generations are continuing to earn and earn more, it’s likely they’ll continue to pump more into ETFs. The set-it-and-forget-it type investing is ripe for this new audience who wants to dip their toes in the water, including the introduction and usage of target funds as options in 401Ks and IRAs. In fact, according to Statistica as of 2018, passive investing is growing exponentially in the US:
- AUM in the Robo-Advisors segment currently amounts to $283 Billion
- AUM are expected to show an annual growth rate (CAGR 2018-2022) of 22.8% resulting in the total amount of $643 Billion by 2022
- In the Robo-Advisors segment, the number of users is expected to amount to 12 Million by 2022
- The average AUM per user in the Robo-Advisors segment amounts to $43,039
Bringing it back to Schwab, their active brokerage accounts are up 6%, their total client assets are up 21% and their proprietary mutual funds are up 19%.
However, total assets among their ETFs more than doubled from 2013 to 2017, an astounding $204 vs $436B. From 2016 to 2017 alone, that was a CAGR of 37% among ETFs vs. 20% for mutual funds during the same period. And only 7% when you look specifically at Schwab’s proprietary mutual funds.
Some final thoughts:
- As more investors jump on the ETF & Robo bandwagon and less use full service advisory services and higher cost Mutual Funds, what happens to the fee structure of these firms as more assets move to the lower cost products?
- Will there be a need to create a new model and what will that model look like?
- Could we see, as we’ve talked about before, an Amazon Prime model of investing?
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