How Disruptive Are Robo-Advisers, Exactly?

A recent Cerulli Associates report assesses whether eRIAs, also known as robo-advisers, could be challenged in the medium and long terms by a “first-mover effect.”

“The electronic registered investment adviser [eRIA] or robo-adviser business model presents the opportunity to bring technological upgrades to an industry hampered by legacy systems,” says Frederick Pickering, research analyst at Cerulli.

At the same time, traditional advisory firms and investment providers have asked about the potential for robo-advisers to disrupt an industry not exactly known for rapid innovation. While many see opportunities for traditional and digital advice models to work in sync, some robo-practitioners predict their firms will make the human-to-human financial advisory model obsolete.

Pickering says the latest Cerulli reporting suggests this latter view is probably overstated.

“During the past few months, significant developments from existing direct firms have dramatically changed the eRIA conversation,” he explains. “While the low-cost business model pioneered by these firms may stick around, it is unlikely that the eRIAs will be able to compete with the low-cost offerings of the direct firms.”

For example, it caused a lot of retirement industry chatter when Northwestern Mutual announced last week that it is acquiring financial education technology provider LearnVest. This type of deal, through which a long-established investment services provider with a traditional sales, distribution and client-service structure uses its considerable scope and financial resources to purchase and integrate unique competitors, represents one of the major “threats” to the robo-adviser model, Cerulli explains.

Pickering says robo-advisers still enjoy considerable tailwinds and opportunities for success and lasting independence, but firms could be targeted for acquisition by the big players in the years ahead. Others may see their uniqueness and competitiveness fade in the face of responsive innovation.

“For eRIAs, imitation is a serious threat to their continued existence,” Pickering adds. “These firms have rolled out innovative ideas, but the existing financial services industry has ample resources available to replicate the robo-adviser business model. Previously, many robo-advisers banked on the idea that financial firms were unwilling to duplicate their model for fear of upending their revenue.”

Instead, as explained in the “The Cerulli Edge – U.S. Edition,” traditional firms are starting to respond to the “innovator’s dilemma” by building their own eRIA-type services, or by purchasing digital advice service providers that seem like a good fit with the existing sales structure.

“With increased fee compression and expanded services from the direct space, eRIAs may be forced to change their business models to become technology providers to advisers,” Cerulli concludes, similar to findings shared recently with PLANADVISER by another research firm, Corporate Insight. “The larger direct firms may replace eRIAs in the automated investment space, but the presence of eRIAs will have changed the advisory industry for the better. By emphasizing low cost and sleek technology, they have forced existing firms to take technology offerings seriously.”

More information on obtaining Cerulli research is available on the firm’s website.