The 11 leading robo-advisers—firms that leverage client information and algorithms to develop automated portfolio allocation—had $19 billion in assets under management at the end of 2014. This is according to a report from Deloitte titled, “Robo-Advisors: Capitalizing on a Growing Opportunity.”
“However, these new market entrants are still nascent and represent a trivial amount relative to the $25 trillion retail investable assets in the United States,” Deloitte says. “Their lack of distribution has likely contributed to difficulties in reaching a large number of potential customers.” But with large wealth management firms like Charles Schwab and Vanguard now entering the fray, that might change, Deloitte predicts.
The reason why robo-advisers might gain traction is they typically provide advice for as little as 20 basis points and in some cases, at no charge, according to Deloitte They might also appeal to younger investors who are digitally savvy and
want to access their portfolios anywhere and anytime.
It also cannot be overlooked that some wealth management firms are investing heavily in “big data and advanced analytics,” potentially leading to more personalized advice. And, some wealth management firms are combining robo-advice with their existing advisory offerings for a hybrid model. Finally, technology has lowered the barriers for firms to offer robo-advice—and Deloitte thinks “non-financial firms with access to large numbers of retail investors and leading-edge technology firms will likely also enter wealth management through a robo-advice model.”
NEXT: How adviser practices should respond
Advisory practices that serve high-net-worth individuals who
can afford person-to-person advice may not want to embrace these new
robo-advice developments. However, those
that serve the mass-market “will likely need to embrace digital strategies and
tools to help maintain competitive advantage in this new market environment,”
Deloitte says. “Although it is only the beginning, wealth managers should
react, as this hybrid service model will likely become the new norm.”
Deloitte outlines three ways advisers can enter the robo-adviser field. They can partner with an existing robo-adviser, which will help them avoid the costs and risks of building a solution to fit their legacy systems. An example of this is Fidelity Investments partnering with Betterment. They can go the in-house route, which gives them the control to offer various functions. Vanguard and Charles Schwab have taken this approach. Or, they can acquire a robo-adviser, like Northwestern Mutual’s purchase of Learnvest.
“Robo-advice is here to stay and poised to evolve into much more disruptive and wide-ranging forms of advice. All wealth management firms should take notice,” Deloitte concludes. Deloitte’s report can be downloaded here.