The Great FinTech Robo Advisor Race

By Falguni Desai for Forbes

Perhaps no other sub sector of the fintech arena has received as much institutional and retail interest as the robo advisors. The business of financial planning and personal investment affects large pools of capital and large investor segments. Innovation in the investment technology space is creating a fierce race among startups, brokerages, wealth management firms and insurance companies to serve a shifting and evolving account base. But there are many factors to consider as competition heats up.

Who Are the Robo Advisors?

By now, the robo advisors are familiar to almost all fintech watchers.  These are the startups which have garnered media attention and customers given digital native investment accounts.  Their services include automated portfolio planning, automatic asset allocation, online risk assessments, account re balancing and other digital tools, available for a low fee with account minimums as low at $10,000 USD.  Fees are competitive and range between 15 to 35 basis points of AUM.  Well known players include Betterment, Wealthfront, Motif andFolio, among others.

In general, robo advisors allow more people, who otherwise may not be able to invest with confidence or meet account minimums, to enter the market in a passive fashion.  Traditional wealth management firms and financial advisers charge 1%  of AUM or higher. Robo advisors satisfy a need for more economical, automated and digital planning tools which might be preferred by younger, digital savvy investors or those who want more privacy and control over their portfolio. In what may be a sign of the times, lower yields and low long term interest rates, are also prompting investors to look for new strategies to plan out their financial futures.

Competition in the Playing Field

However, it’s not just the Millennials and other younger generations who prefer digital investment tools. A recent E*Trade Streetwise study shows that in all three age groups of 25-34, 35-55 and 55+, the majority prefer some level of robo or digital toolkits combined with personal advice.  Firms have figured this out and are beginning to compete with the robo advisors.

For online brokers, robo advising feels like a natural extension of what was already an electronic service. Stock brokers went through a massive transformation in the late nineties during the first dot com boom and most, if not all, became online brokers. More interesting is the level of interest in robo advisors from very traditional players such as insurance companies, asset managers and wealth management firms.  These firms are aggressively moving to build, buy and partner with robo technologies.

Recent Strategic Moves

Below is a list of some of the announced combinations and launches in the last two years:

• Northwest Mutual acquiring Learnvest
• BlackRock acquiring Future Adviser
• Invesco acquiring Jemstep
• Vanguard launching Personal Adviser Services
• Deutsche Bank launching maxblue
• Charles Schwab launching Scwab Intelligent Portfolios
• Fidelity Investments launching Fidelity Go
• E*Trade launching Adaptive Portfolio

Challenges and Considerations

The decision for traditional financial institutions to compete with robo advising is, on the one hand, almost obvious, while still involving some complex considerations. Lower fees and the digital transformation affecting the financial services sector has become a universal theme.  The main strategic issue for traditional players who enter robo advising seems to be the impact to their current business.

A vexing issue for those players with a very large AUM base is the potential cannibalization of their fee revenues.  If these players shift to a robo advisor model and charge lower fees for the same AUM, they will, in essence, have to attract a larger AUM base to make the same fees as before, while at the same time investing in new technologies to support the automated planning and digital toolkits. To maintain profitability in the midst of these capital outlays, cost cuts might have to come from a reduction in headcount among their financial adviser sales force.

But it can be even more complicated for those players who want to offer a hybrid service which includes the digital toolkits of a robo advisor while still offering light touch human advisor services. For these types of offerings, different tiered account services, with varying fee levels might be a smarter strategy.

Offering a robo advisor service might be an opportunistic play for wealth management firms who sit at the nexus of the inter generational wealth transfer that is taking place.  Losing accounts through the inter generational wealth transfer is a worry for firms who heavily rely on the Silent Generation and the Baby Boomers for much of their fees. While older generations may have benefited from traditional advisers during an era of very high yields and interest rates, the situation is very different today. Firms must navigate these waters carefully to not appear too digital to their traditional client base, while also not appearing to be laggards to a prospective younger client. While a robo advisor service might be a great way to keep AUM levels steady inside the firm, as younger family members inherit assets from older ones, it may need to be branded separately from other types of accounts.

But for some very traditional and ultra high net worth families, robo advice may never catch on. In these cases, the technology and digital toolkits can scale their human work forces and increase their productivity, freeing up their time to offer more personalized attention to their clients.

As the robo advisor race continues, firms will need to consider these trade offs and craft an appropriate entry strategy to evolve and compete.

Falguni Desai works on innovation and strategic growth for large companies. She can be reached at faldesai@outlook.com