Robos To Get Leaner, Meaner, Serve More Clients

The irony of the online advice industry is that in the next three years more consumers than ever before will be served through Internet algorithms known as roboadvisors, but those consumers will be served by fewer of them.

By 2019, roboadvisors will serve 1.1. million clients, more than triple the 300,000 people served by the online-only advisors today, said industry expert Chip Roame, managing partner of Tiburon Strategic Advisors.

At the same time, by 2019 there will be only 10 roboadvisors, down from a peak of 24 in 2015 as some robadvisors grow bigger, merge with larger or heathier competitors or simply close up shop, Roame said last week in a webinar on the state of the roboadvice industry.

He recounted the frantic movement within the industry.

In March, Roboadvisors Betterment secured $100 million in a new round of venture capital funding. Last year, roboadvisors LearnVest was sold to Northwestern Mutual for $250 million, Future Advisor was bought by BlackRock for $152 million and Covestor was bought by Interactive Brokers Group for $50 million.

“A handful will survive as independents, a handful will be acquired and some simply won't make it,” Roame concluded.

Some advisors will enter into partnership with other big companies. For example, SigFig announced a partnership last month with UBS to help UBS’s army of 7,000 financial advisors.

Roboadvisors have been busy looking for capital to feed their visions of helping investors online and in a fit of explosive growth, those 24 roboadviosrs have amassed $8.7 billion in assets under management by the end of last year.

By 2012, roboadvisors had only gathered $100 million in AUM. But even with $8.7 billion in AUM, the online-only financial advisors still represents only .06 percent of U.S. retail investment assets, Roame said.

Big Winners: Discount Brokerages and Mutual Funds

If more people are choosing to invest through internet algorithms yet fewer roboadvisors are expected to exist in three years, where are those investors going for their online advice?

The big winners in the consumer space are expected to be the online advisory units affiliated with the discount brokerage companies and mutual fund complexes, many of which have well-known brick-and-mortar franchises and advisory networks.

Vanguard, Schwab, Fidelity, TD Ameritrade and E*TRADE Financial, companies with big marketing budgets, will grow bigger at the expense of online-only, consumer-facing financial advice companies, Roame said.

At the end of last year, Roame counted only four discount brokerage firms and mutual fund companies with online advice offerings, but that number is expected to double by 2019, he said.

The 24 online-only consumer roboadvisors and the four discount brokerage and mutual fund companies with online-advice units means there’s about 28 roboadvisors competing for the consumer investment online advice dollar.

By 2019, however, there will be an estimated 10 roboadvisors left but discount brokerages and mutual funds with online advice will have doubled to eight, Roame said.

That leaves about 18 to 20 companies, split about 55-45 between roboadvisors and discount brokerage and mutual funds with any significant online advisory presence. The latter group will be managing billions more in assets than the roboadvisors, he said.

Leaving a Mark

No matter how many online advisor firms are left after the wave of consolidation floods into the market, they will have left their mark.

Online advice companies have forced the advice industry to improve the internet user experience for consumers, Roame said.

To improve the experience, traditional advisors have had to improve their technology by either building a platform in-house or renting one from an outside vendor, both of which have conspired to raise the cost of doing business for traditional advisors.

Advisors have also seen downward pressure on fees, as one of the big advantages of internet algorithms is that they charge less than traditional advisors.

So far, traditional advisors haven’t reported an exodus of clients due to competition from online-only advisors, but the online wave has forced advisors to consider lowering fees, Roame said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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