Executive Summary
While several of today's leading "robo-advisor" companies were founded in the aftermath of the financial crisis, it wasn't until early 2012 that they finally converged on a common low-cost "automated investment service" model... which, coupled with a surge of media coverage, quickly suggested that they could become the future of financial advice (or at least investment management) for consumers.
However, in the year since established players like Schwab and Vanguard launched ‘competing’ services, a fresh look at the robo-advisor landscape reveals that their growth rates are falling rapidly, to just 1/3rd their levels of one year ago. Their apparent demise: an inability to scale their marketing to sustain growth rates in the face of increasing competition and challenging client acquisition costs, coupled with a similar inability to grow their average account sizes.
In fact, the combination of rising client acquisition costs and declining average revenue per client may be an outright death knell for the direct-to-consumer robo-advisor movement, as they approach the unsustainable crossover point where the lifetime value of a client, cumulatively, is less than the cost to acquire a single client (given that some have a mere average gross revenue per client of just $50/year!). Accordingly, it's not surprising to see many of the early robo-advisor players pivoting in other directions, using their long runway of available dollars to try to find greater growth traction, with at best one or two that might manage to build a viable brand that survives.
Nonetheless, in the long run we may still look back at this moment as one of significant transition for the industry, not because robo-advisors disrupted human advisors, but because the emergence of robo-advisors was the needed catalyst for the industry to reinvest into the future of financial advisor technology. Already, tech-augmented human advisors are rapidly growing past both their robo-advisor and traditional human advisor peers, and an outright “arms race” of technology is emerging amongst financial advisor custodians and broker-dealers all seeking to be the future platform of choice.
Which means in the end, the direct-to-consumer robo-advisor movement may be dying, with VC funding suggesting Betterment may soon be the last man standing, but the legacy of their technology will continue to be transformative for years to come, just as online brokerage in the late 1990s didn’t disrupt financial advisors but instead became the backbone of how we execute our businesses today!
B2C Robo-Advisors Disruption Started With A Bang
Betterment first launched as the original "robo-advisor" in May of 2010, and later that fall won a Finovate 2010 "Best In Show" award for its simple, self-directed-but-technology-assisted investment solution. In late 2011, a platform aimed at pairing investment managers with investors, previously named KaChing and later Wealthfront, pivoted to become an "online financial advisor" as well, with the vision of disrupting traditional financial advisors by automating the investment management tasks that "expensive" human advisors perform at a price point of only 0.25%. And when a few months later, Betterment lowered its pricing (previously at 0.3% to 0.9%) down to a 0.15% to 0.35% tiered graduated fee schedule as well, the race was on for low-cost "automated investment services" to take over the investment world (with FutureAdvisor pivoting to join the fray a few years later as well).
And early on, the results were promising. After about two years, the platforms were both over $500M of AUM, and their rapid growth fueled a big round of raising $30M+ in capital (each) in early 2014. Using these funds to begin scaling the marketing, it took Wealthfront only another 6 months to cross from $500M+ to the $1B of AUM threshold, and barely another 9 months to cross the $2B threshold by April of 2015. Similarly, once Betterment raised capital, it took about 8 months to move from $500M+ to its first $1B by the end of 2014, and was closing in on $2B just 5 months later.
Yet one year beyond these $2B of AUM thresholds, the environment has shifted significantly. As predicted, 2015 was the year that the established financial services companies launched their competing offerings and tried to undercut existing robo-advisors by throwing in the service “for free”, from Schwab’s Intelligent Portfolios solution with no AUM wrapper fee (because Schwab makes money on most of the underlying fund positions), to Vanguard’s Personal Advisor Services offering a full financial planning solution for a 0.30% cost that’s barely above the price of a robo-advisor’s investment-only service (and includes not just automated investing but a personal financial advisor as well!).
Robo-Advisor Growth Rates Are Plummeting
As a result of the rising competition – or perhaps simply the possibility that the total market for purely self-directed automated investment advice is smaller than these companies expected – the pace of new asset flows have remained relatively flat at both Betterment and Wealthfront since the end of 2014. Based on the companies’ latest Form ADV disclosures, the pace of AUM growth at Betterment is around $150M/month, where it was a year ago, and AUM growth at Wealthfront is down to barely $60M/month over the past 6 months.
While the companies did experience an uptick in growth in the second quarter of 2015, in retrospect this appears to have been a function of the increased media buzz of the time. After all, Schwab Intelligent Portfolios launched in March of 2015, and Vanguard’s solution came out of beta last May, which triggered a burst of high-profile media coverage comparing all of the services (with the implicit marketing that entails). Which means once the initial media buzz wore off by the end of the summer, the companies returned to their ‘normalized’ growth rates of around $100M per month (which would be even lower if Betterment's B2B Institutional and 401(k) platforms are excluded).
In addition, it’s notable that relative to their growing asset base, drawing in “just” $100M per month actually represents a drastic decline in the growth rates of the companies. After all, in theory growing to twice the AUM and twice the number of clientele should lead to twice the asset growth for the company thanks to twice as many clients who can refer, allowing it to maintain a consistent growth rate.
Instead, relatively flat net flows supporting an ever-growing asset denominator is causing robo-advisor growth rates to crash, with both Wealthfront and Betterment growth rates falling to just 1/3rd of their levels from a year ago.
Given that Morningstar estimated last year that robo-advisors need at least $16B and as much as $40B of AUM just to cover core operating costs and recoup advertising expenses, and that robo-advisors may need $50B - $80B of AUM or more to justify their $500M - $700M company valuations, the current linear growth pace of even $150M per month implies that Betterment and Wealthfront may not even reach $10B of AUM by 2020, a mere 1/200th the size of what a sensationalist A.T. Kearney study projected for robo-advisors just a year ago!
Are Client Acquisition Costs Burying B2C Robo-Advisors?
To say the least, falling growth rates for robo-advisors suggests that client acquisition – and in particular, scaling client acquisition – is becoming a significant (if not fatal) challenge for today’s robo-advisors.
The first sign of this shift was when robo-advisors began to pivot to “traditional” advertising approaches to promote their digital business, from television commercials for both Betterment and also Wealthfront, to Betterment’s much-buzzed-about ads on the roofs of NYC taxicabs. If the vision of these companies was to be a digital solution for digital natives, why the explosion of ‘analog’ marketing strategies?
Second, the robo-advisors have been increasingly shifting from their original core B2C market in search of new growth channels. For Betterment, this has included everything from complementing their Millennial-centric service with a “RetireGuide” for boomers, to the launch of Betterment Institutional for advisors, to their Betterment for Business 401(k) offering. In the case of Wealthfront, it’s been not only building on their Direct Indexing 2.0 solution, but an increasingly aggressive approach of giving their services away for “free” to get users, from Wealthfront.org providing non-profits a waiver of management fees on the first $1M of AUM, to Wealthfront in the Workplace for employers to cover employee management costs for the first $100,000, to simply offering to manage the first $10,000 of client accounts for free. Last July, Wealthfront dropped its minimums all the way down to $500 just to encourage new users to at least try them out (and undercut Schwab Intelligent Portfolios’ $5,000 minimum), and more recently just announced its Wealthfront 3.0 platform with a bevy of 'non-traditional' integration partners (including Venmo, LendingClub, and Coinbase) and an announcement of Artificial Intelligence (AI) features, even as commentators have noted that it's not clear how any of this will help Wealthfront's growth in the foreseeable future.
Of course, I’ve actually been an advocate of some of these programs, from Betterment’s pivot into serving financial advisors (and a 401(k) space that clearly needs some structural improvements!), to the tremendous potential of Wealthfront’s Indexing 2.0 solution. Nonetheless, the rise of competition from traditional financial services firms like Schwab and Vanguard appear to be increasingly boxing Betterment and Wealthfront into their original channel of Millennials with “small” investment accounts. Accordingly, despite launching more and more of these new initiatives, Betterment’s average account size has remained pegged around $20,000 since Q4 of 2014, and Wealthfront’s average account assets have plummeted over 40% and are converging to Betterment levels as well. Especially when recognizing that Wealthfront waives fees on the first $10,000, so their billable average account size is even closer to Betterment.
This is very troubling from the perspective of purported robo-advisor “disruption”, as the whole principle of Clay Christensen’s “Disruptive Innovation” relies on the business growing and moving upstream over time – with a rising Average Revenue Per User (ARPU) to support it – while Betterment’s APRU appears flat and Wealthfront’s is crashing (likely driven in large part by its recent decision to drop its minimums to $500 and aggressively market to such accounts). In other words, robo-advisors said they were going to disrupt financial advisors, but instead they’re being boxed into the small accounts that financial advisors weren’t serving anyway.
In addition, falling average account sizes may simply be a death knell for the B2C robo-advisor business model altogether. An average account size of $20,000 produces revenue of just $50 per year at a 0.25% fee schedule. Even if robo-advisors are managing to achieve a 98% monthly retention rate and facing just 2% monthly churn, their annual retention rate will be barely 80%, which equates to projected lifetime client revenue of just $250 cumulatively. This is rather troubling, given at least one UK study recently estimating robo-advisor acquisition costs of $312 per client, and Morningstar estimating client acquisition costs could be as high as $1,000 per client for some. In other words, robo-advisors may be spending more to get clients than they are ever expecting to receive, cumulatively, in revenue from those clients.
And that’s simply based on gross revenue, before considering the operating costs of the business. Even if we “generously” assume at the margin that robo-advisors can achieve 50% profit margins on a per-client basis, that’s a cumulative lifetime client value of $100 at an 80% retention rate (and before considering discount rates and cost of capital!). If robo-advisors are spending $300 per client to generate $100 of profit per client, it’s just a matter of time before they burn through their venture cash, especially given the charts above showing that margins are not expanding and revenue-per-client is actually falling!
And these are the stats from amongst the purported “leaders” in robo-advice. Amongst the other players, the outlook is even bleaker. After all, Google announced that it would be shutting down its Google Compare (previously Google Advisor) service altogether in March, Hedgeable reports only $43M on its latest ADV, and two years after WiseBanyan’s Herbert Moore published a controversial article predicting that “You Will Be Investing For Free In 5 Years” using robo-advisors, the service has only a paltry $49M of AUM (and of course, zero revenue, since it’s free, though the company launched its "WiseHarvesting" tax loss harvesting service for 0.25% six months ago, which simpy puts it in direct pricing and services competition with other robo-advisors instead). Nor does it look much better overseas, as leading UK robo-advisor Nutmeg has lost both its CEO and COO in the past month, too.
In addition, it's notable that the growth rates of robo-advisors are slowing even in a bull market. None have yet faced the impact of a bear market, which is likely to hit robo-advisors even harder than traditional advisors, both because their younger clientele tend to be invested more aggressively (so their portfolios will be more volatile to the downside), and their younger clientele are more likely to be laid off and be forced to stop their contributions (as the young and inexperienced are, sadly, usually the first to be fired in a recession), and when their younger unemployed clients need to tap their savings to make ends meet they'll likely liquidate their robo-advisor accounts first (which don't have the tax penalties that would be associated with liquidating their 401(k) plans instead).
In the meantime, established financial services firms are using their established brands to quickly outpace the original B2C robo-advisors, either by packaging the robo-advisor offering as another managed account on its platform (Schwab), or offering a full-on human-tech hybrid financial planning offering (Vanguard). Because these companies can leverage their existing B2C brands to achieve a drastically lower client acquisition cost, and as a result the sheer volume and scale of their growth makes the other robo-advisors look like their growth is already flat!
B2C Robo-Advisors May Be Dying, But Their Technology Won't
Ultimately, it appears that robo-advisors are failing (to validate their VC valuations, and possibly their business models altogether) because they misunderstood the fundamental problem that the financial services industry faces in serving small accounts and young investors. The issue is not the operational efficiencies in serving them – which technology is particularly effective at solving.
In other words, like bringing a knife to a gun fight, the robo-advisors brought an operational cost efficiency solution to what is fundamentally a marketing and client acquisition cost problem.
Nonetheless, this doesn’t necessarily mean that the robo-advisor technology solutions are “bad” at serving clients effectively and providing value to them. Given the funding they've already raised, today's existing crop of robo-advisors will likely continue fighting to grow, and serving their clients, for years to come. And in fact, I suspect the collective industry angst over the rise of the robo-advisors derived quite directly from the embarrassing light the robo-advisors shined upon the too-often-mediocre technology solutions we use as ‘traditional’ advisors and larger financial services institutions. None of us appreciated how bad our technology was, because we were all comparing to everyone else’s similarly-bad tools. The robo-advisors provided a new point of comparison, and it was very embarrassing for everyone.
In turn, the mismatch of robo-advisors to the marketplace (solving an operational efficiency challenge but unprepared for the client acquisition challenge), coupled with the industry’s desire to improve its own technology capabilities, has driven the mass robo-advisor pivot over the past year, from being a B2C solution to a B2B (or B2B2C) solution instead. From Jemstep’s pivot from B2C to B2B (and subsequent acquisition by Invesco), to FutureAdvisor’s switch from B2B to B2B when Blackrock purchased it, to Northwestern Mutual buying LearnVest and John Hancock buying Guide Financial, Envestnet buying Upside Advisor and Yodlee, and Fidelity buying eMoney, the traditional industry is hungry to step up on the technology front. And of course, that’s before we consider the companies that decided to build their own solutions rather than acquire, including Schwab’s Intelligent Portfolios (and Intelligent Institutional Portfolios for advisors), and Vanguard’s Personal Advisor Services.
And notably, even as robo-advisors were hailed in the media as the future of investing, the funding to existing robo-advisors has drastically slowed (with Betterment the only player to raise significant capital in the past year, though several have enough dollars in the bank to keep fighting for years to come), and the pace of new robo-advisor company launches has ground to a virtual halt. The slowdown of capital to robo-advisors seems to be driven by the realization (finally) of VC funds that a robo-advisor without an innovative solution to the client acquistion cost challenge will be dead on arrival. Accordingly, while it may still take many years for the early robo-advisors to work through their existing venture capital dollars, it's not surprising that the few and only robo-advisor platforms now emerging are those that already have an existing membership or readership to reach, where the robo-advisor solution is simply a way to monetize the current audience, not an "if you build it, [hope] they will come" offering. As long as they don't raise "too much" capital and exceed the realistic size of their markets, the upcoming "robo-advisor" solutions like the one for Krawcheck's Ellevate network and Steinberg's WorthFM (marketed to 1,000,000+ DailyWorth readers) should have good potential to go into the (automated) investment management business with their existing audiences.
Technology Isn’t Replacing Advisors, It’s Augmenting Them
What these dynamics reveal is that robo-advisors aren’t replacing financial advisors; the technology is being used to augment financial advisors, as shown by the explosion in FinTech buy-and-build activity by established financial services companies... the ultimate outcome that was predicted from day one on this site 4 years ago. Whether you want to call them “cyborg” advisors (as I once did), or prefer Joe Duran’s “bionic” advisor label, these tech-augmented hybrid human advisors who are leveraging technology are growing fast. Just witness the explosive growth of Vanguard’s solution (which is not a robo-advisor but a tech-augmented human solution, and is now over $30B, or nearly 10X the size of the nearest robo competitor). Or the fact that Personal Capital (another not-actually-robo-but-tech-augmented human platform) is as large as Wealthfront and Betterment combined when measured on the basis of revenue instead of assets.
Still, it’s equally important to recognize that these tech-augmented solutions aren’t just beating the robo-advisors. They’re growing faster than most human advisors, too, as one industry benchmarking study after another is showing that technology-centric human advisor firms are outpacing their fellow advisor peers on everything from revenue growth to profits.
In other words, what was originally framed as a battle of “robots versus humans” was misguided from the start. At best, robo-advisors were not serving the people that traditional human advisors were serving anyway. At worst, robo-advisors set out to disrupt with a model that is now proving to be neither disruptive (as average revenue per client isn’t growing) nor even viable (as client acquisition costs appear to exceed lifetime client value, especially given the lack of any revenue-per-client growth). Thus, again, we see that no serious new B2C robo contenders have emerged at all in the past two years (without already being attached to an existing mega-B2C brand), the only ones even considering the space now have both a very targeted client acquisition channel from which they can grow (e.g., WorthFM or Ellevest), and venture capital dollars have shifted from funding an array of new companies to staking $100M on Betterment to being the one lone survivor of the original class of B2C robos under the fundraising acceleration thesis (which doesn't bode well for the ability of competitors like Wealthfront to attract and retain talent).
Nonetheless, the emergence of the robo-advisor has accentuated what is quickly becoming an arms race of technology for traditional financial services firms, as advisors demand better technology than doing account applications with fax machines (still true for many platforms!!) and using the industry's available rebalancing software solutions (many of which were designed more than 10 years ago). In turn, advisor platforms are quickly seeking to build or acquire it to provide it to them, and the tech-augmented humans are increasingly pulling ahead of both their robo and human counterparts. Though notably, the long-term winners will still be the ones that also figure out how to solve the client acquisition cost challenges of getting clients – which, again, is a marketing problem, not a “robo” problem – as just putting robo-advisor technology on a website and waiting for clients to show up is not likely to work for human advisors any better than it did for robo-advisors! In other words, most advisors, broker-dealers, and custodians, who just slap a robo-advisor self-service portal onto their websites will be even more dismayed by the results than the B2C robo-advisors have been (as at least those firms had some Millennial marketing strategy to drive results!).
Ultimately, what this all means is that, even as the B2C robo-advisor movement is dying, and the VC funders suggest Betterment may soon be the last man standing, the legacy of their technology impact is only beginning. Just as online brokerage in the late 1990s didn’t disrupt financial advisors and instead became an offering of B2C brands (e.g., Schwab.com) and eventually the core platform that advisors use to operate their businesses (every cloud-based custodian and broker-dealer platform today), so too is robo-advisor technology is shifting from a B2C solution, to one part of a product line for a B2C company, and eventually will simply be the next evolution of technology upon which the entire industry operates. In fact, I suspect that today’s environment may mark as significant a technology transition for financial advisors over the next 15 years as the explosion of the internet and online brokerage was in boosting the success of financial advisors for the past 15 years!
So what do you think? Are we witnessing the slow death of the robo-advisor, or is their best growth still yet to come? Do you think "robo technology" is relevant to traditional financial advisors? How will we look back on this "robo era" 10 years from now?
Great Article. I have always said the robo ‘s are not my competition. They are competing against Schwab, Fidelity, TD, and Vanguard retail do it yourself investor for the most part. I for one hope they don’t dye off because I think their Fin Tech innovations has only helped me serve my clients.
Joe,
Amen on the technology itself. As noted in the article, I think the “nudge” that robo-advisors gave to our entire financial services tech ecosystem was fantastic, and will be a positive long-lasting legacy.
It’s just important to distinguish “the technology” itself, from “robo-advisor” as a B2C model.
– Michael
Another great article, Michael, and appropriate follow-up, Joe. The sooner more advisors realize how to add true value for the client, the better. No-one can rebalance a portfolio as efficiently as a computer and hence shouldn’t try. Spending an inordinate amount of effort trying to add alpha to a portfolio, only to see it obliterated quickly (a la the first 6 weeks of this year!) wastes time, talent, and often a subconscious excuse by an advisor who is adverse to hunting new business.
I do believe a future step along the DOL pathway will be for them to comb through advisors’ books of business and present a “please explain” as to why the advisor, who is claiming a fiduciary duty, has, over their book 15 small cap growth funds, 10 large cap value funds, etc – all with different expense ratios, all with different performance numbers. The advisor just can’t shrug and say, “Well, once they were ACATed in, I guess I didn’t monitor them.”
To my point regarding robo-advisors, once the advisor thinks they can add alpha to the account, they’d better be prepared to devote a lot of time to watching the markets, especially these days with the heightened volatility. Clearly I’m a big proponent for trading models…
Michael, same sorry state here in the UK. The poster boy, nutmeg, appears to be in trouble, if the rumours in the industry press are correct, with the management in upheaval.
The key as you say is low cost of customer acquisition. Why launch a biz where the revenue is a fraction of the incumbents and the cost per new client is multiples!
That’s what’s so “nice but appalling” about Acorns. Average client AUM $156 with a monthly fee of $1. i.e. 8% per annum. 🙁
What about those hybrids that started out with a personal advisor like Personal Capital?
The hybrids are all faring drastically better. Vanguard’s hybrid quickly became the leader, Schwab’s is arguably a quasi-hybrid (it’s a “robo” solution but their primary adoption is coming from existing Schwab clients, who appear to be getting cross-sold into the “robo” by branch financial advisors who treat it like another managed account).
And amongst the “purely new crop” of start-ups, Personal Capital is lagging by assets (about $2B of AUM, compared to $3B to $4B for Wealthfront and Betterment) but is leading by far on revenue, as Personal Capital fee schedule starts at 0.89% while Betterment and Wealthfront run 0.15% – 0.35%. So if you measure the start-ups by revenue – what people are actually willing to PAY for – Personal Capital as a hybrid is again outdistancing pure robos. See https://www.kitces.com/blog/personal-capital-crosses-1b-aum-as-tech-augmented-human-advisor-revenue-outpaces-all-other-robo-advisors-combined/ for some discussion of how this dynamic was already emerging over a year ago.
– Michael
Thank you Michael. You are a respected resource for this financial advisor.
Robos gave us a kick in the rear, forcing us to move away from manually managing portfolios and now utilizing technology. We were spending more time executing our investment strategy than researching our investment strategy, not to mention the many other duties holistic advisors must do. Thanks robos, and may you take your innovation from B2C to B2B.
And speaking as a co-fiduciary advisor to company retirement plans, we do not see Betterment having much success there either. Not because they don’t have a good product, but because it already exists with other established TPAs, and they have no learning curve to climb.
Rob,
Strictly speaking, I don’t think robos really “commoditized” asset management either – simply because it was ALREADY commoditizing as more and more advisors adopted the AUM model and it became less and less differentiated. Witness the rise of the TAMPs, and their recent struggles, which preceded the robos.
In other words, the robos may have been the “poster boy” for the commoditizing-asset-management trend, but I don’t think they caused it. Nor will it end when they’re gone…
– Michael
I have a perspective as a FinTech developer, specifically for rebalancing software. My current business model is essentially B2C where C is a self-directed investor. Acquisition has been a big challenge. I feel the same pain that Michael describes for robos (but at a tiny scale in comparison). It is tough to reach the average investor and describe your value proposition. And then you must close the sale via web-only advertising.
I may pivot to become B2B aimed at small firms that can’t justify expensive rebalancing software. This would parallel the pivots described in the article. The customer base for this approach is probably small enough to reach with targeted advertising. Certainly not millions as for B2C, most of which a small company will never reach. Michael, I wonder if you can quantify the market size for “small” RIA firms that might be open to such an offering?
See my website http://www.statespacetech.com for more detail.
Brian,
Numbers for small RIAs is remarkably spotty and debated – see http://www.riabiz.com/a/5041684891041792/how-many-rias-are-there-no-seriously-how-many – as there don’t seem to be good numbers to roll up all the small state-registered investment advisers into the SEC numbers.
You would have some competition in this space as well, including TRX, Red/Black, and TradeWarrior, as well as “bigger” players like Tamarac and iRebal. Not that it’s a fully “satured” space, but you’ll need to consider integrations to custodians (Schwab, Fidelity, TD Ameritrade, as well as “start-up friendly” platforms like SSG, TradePMR, and Scottrade Advisor Services) to serve up proper trade orders (and download position data, unless you also integrate with third-party portfolio accounting solutions), and also come up with a feature set that is differentiated enough to be of interest (where all the players do the “basic” blocking and tackling of rebalancing).
Certainly not an impossible option, but it is a more crowded space than it was a few years ago.
– Michael
Several firms (notably TradePMR) have their own free re-balancing software. I would have no need to pay for it unless I was using multiple custodians.
Excellent article – particularly liked “Technology isn’t replacing advisors. It’s augmenting them”. Music to my ears. Robo-advisors have moved on from serving the underserved millenials to becoming essential tools for advisors to make sure they manage their business in compliance with their fiduciary duties and to make life easier for them. As you point out, what started out as a marketing gimmick is proving useful for operational efficiency.
Hi Michael, amazing article congrats!
I was astounded with the annual churn of 20% (80% annual retention) is that normal for the general industry? (I was always calculating 90%/92% annual retention rates judging by Schwab, TD Ameritrade and ETrade’s SEC 10k reports).
Thx!
Financial advisor practices are often recognized for having 90%+ retention rates, and “great” advisory firms often sit at 97%-98% annual retention rates.
The direct-to-consumer do-it-yourself segment is generally viewed as being more fickle and having higher turnover rates, especially for small portfolios that have low barriers to entry but also low barriers to exit.
That being said, I haven’t seen any ‘good’ data on this, just a collection of rumors and anecdotes that have been brought to me over the past few years that suggests to me this number for illustrative purposes is not unreasonable. Relative to most SaaS models, 2% monthly churn is a pretty good number as well, but with robos sitting at the strange intersection of SaaS and asset management, I’m not sure anyone really knows beyond the companies themselves. :/
– Michael
Fantastic article, yet again 🙂 Great insights to both the Robos and Humans 🙂
I love Betterment. I’m older and have waaaay more than their average assets per customer. Schwab’s offering is a joke. They put way too much in cash, which is where they make a big portion of their fees. Vanguard charges double what I pay at Betterment…double….for the opportunity to speak with an “advisor”. Why do I want to speak with a salesman? I only want a diversified portfolio, and their “advisor” isn’t going to add any value here. I believe young investors should hire robos for their investments and real advisors (not salesmen) for every other financial planning issue. Let’s be honest. The CFP designation does NOT make the CFP an investing expert. One course an expert down not make. Yet many use that moniker to offer investing advice and sell products.
One of the best things robos have done is make the public realize that advisors add no value to investing. They are not knowledgable and only push products for commissions. A robo such as Betterment does better at configuring, rebalancing and tax loss harvesting a portfolio than the average broker, now called financial advisor, ever could.
In an ideal world, I see a robo like Betterment handling the investment needs for .15% fee and a true financial planner helping with all the other needs of the young generation. For the older folks like me, I don’t need help with insurances, or budgeting. Why pay a fee for an advisor to put you into Betterment or the firm’s own in house Robo? Why pay a fee to a planner to refer you to an accountant and estate planning attorney. I did that myself and didn’t have to pay an extra fee to the jack of all trades CFP.
I sure hope the independent robo advisors can survive.
Tom,
I think the following article Mike wrote awhile back talks about the value proposition of a good advisor. It is not always easy to quantify. I think many people won’t listen to a notification on their phone rather than a real human when something needs to be done.
https://www.kitces.com/blog/6-key-value-propositions-a-good-financial-planner-can-provide-for-clients-seeking-a-better-return-on-life
I agree that a well diversified portfolio is the most important thing. However, robo advisors tend to have a very limited investment selection offering. Even Betterment Institutional does not allow advisors to change up the investing strategy. Some advisors might argue that in some asset classes active mutual funds or smart beta ETFs make more sense.
It seems like though you are not the average consumer who would see a financial planner to begin with. I would not generalize all CFPs. Sure some of them have a sales background and limited investment experience. Ultimately it comes down to service to not have to worry about anything.
My simple point is that CFP’s are highly touted, and are better than the salesman broker. But one course on investinG does not make them experts.
I don’t think it’s about the CFP mark or any other designation, per se. It’s about how closely an advisor works WITH the client. The best advisor in the world is sort of useless if he has 1500 clients he is “servicing” over the phone.
I agree
I have always wondered if you really understand what a robo is doing, why would pay even Betterment’s fee?
BA31 and Tom,
I also wondered about paying fees for on-going portfolio management. That said, I feel that it is worthwhile to pay for planning and initial portfolio construction. I did just that and decided that rebalancing was “just arithmetic.”
What I learned is that rebalancing with multiple accounts (taxable and tax-advantaged), multiple custodians, taxes and trading costs makes that arithmetic pretty difficult. I wrote my own very general rebalancing software to use for myself and ultimately turned it into a product “Balancing Act”
I would like to think that portfolio rebalancing could become commonplace almost like TurboTax or even checkbook balancing. That is not a prediction, however, because as of now I have not found enough investors like BA31 that understand that even Betterment’s fee is more than they care to pay.
It seems that the consensus is that robos have raised the bar for FinTech. Ultimately investors will have a choice among full-service advisors, robos and technology suited for do-it-yourself investors. The investing public will win. Old school advisors that don’t embrace appropriate FinTech will not win.
Brian,
Your last paragraph there nails it.
– Michael
Michael,
Have you and your team had discussions regarding the robo’s and potential compliance issues? Tom, above, mentioned that he was “older”. I have serious concerns about how the robo’s are going to fulfill their compliance requirements regarding their older clients capacity issues.
This is generally an untapped issue.
Regulators have already begun to raise some concerns about the general case of “what happens if a self-directed user answers the robo-quiz wrong” when there’s no human to ‘verify’ the answers. The case of someone with mental incapacity is a more narrow but clearly more extreme and concerning scenario therein. :/
– Michael
Self directed users usually don’t answer any questions, they just invest. So with a robo advisor at least they are thinking about these questions, and they are not so difficult as to answer them wrong. Besides, the typical question of “what’s your risk tolerance, on a scale of 1 to 10” is the most worthless question out there. In a bull market it’s an 8 or 9, and in a bear it’s a 2. Useless.
I also expect the good robos to evolve overtime and address a lot of potential concerns or problems. We shall see.
But at least we are starting to see the demise of the worthless broker/salesman who added no value to their clients, yet made huge incomes from commissions and large fees.
I’m 64 years old. I have plenty of time before being concerned about mental capacity.
Brian, I don’t have a problem with Betterment’s fee or fee’s in general. I think we can all agree, as Michael and other’s have addressed that the 1% standard fee is dying and will continue to die a slow death. This I believe will be the robo’s biggest legacy. I liken it to Schwab busting the standard stock commission way back when and the discount stock trading brought on by the internet. For some people with a never ending desire to do stupid things in the stock market, a 1% fee is a bargain.
In terms of rebalancing directly, there is certainly an argument to be made as to the amount of balancing required, the frequency, and even if it is beneficial in the first place.
Good question. I don’t mind paying such a small fee for a few reasons. Constructing a well balanced thought out international stock/bond portfolio using software I don’t have access to is one. Automatic rebalancing if it deviates too much is another. And tax loss selling when the opportunity presents itself is a third reason. Never paying for trades is a bonus.
I’ve been in this industry over 30 years on the sales side, and have had all the licenses available, but I realize my own shortcomings in portfolio construction and management.
I see your point Tom. The fee’s are so low that at this point the DIY investors are walking over dimes to pick up pennies. I get it. But with that said, I think the robo’s have drastically overstated their value added proposition of the portfolio constructing, rebalancing, and tax loss harvesting. Certainly these are more compelling as the size of the account increases, but these “value add-ons” are largely “bull market” feel good marketing fluff. People don’t fail at investing due to the factor’s Betterment trumps. They fail because they don’t save enough and without exception, at some point in time, do the wrong thing at exactly the wrong time. The robo’s believe they will add value in that area through risk assessment’s, ongoing education and coaching, etc. They believe they have solved the behavior finance riddle and they are sadly mistaken. It is a mirage. If you can simply click and change your risk assessment or close your account they have solved nothing. If investor’s do the wrong thing at the wrong time, rebalancing, low fee’s, and tax harvesting are simply irrelevant. If you believe that robo clients won’t, at some point, puke all over their computer screens, than you are betting against human behavior since the begging of time. EVERY CLIENT has their breaking point. The robo’s are simply a turbo, dressed-up version of the 401k plan. A mouse button is not a firewall between a client and their money.
Don’t mistake this as a bold defense of the human advisor either, but a good advisor’s value IS NOT specifically sophisticated portfolio management, it is keeping a client from doing horrifically stupid things. Trust me, every advisor with some tread loss on the tires can tell you stories of even the smartest people losing control. At the breaking point, the only thing between a client and doing something stupid is the fact that at some point they will have to face their advisor. 99% of the time the client will at least pick up the phone. I don’t know what that is worth in terms of a fee. I have no clue, but making one or two mistakes has the long-term compounding effect well beyond even an outlandish 1% AUM fee. It only takes one major mistake. Nobody sits in retirement regretting the rebalancing or the tax harvesting they did not do in 1978.
True. But the advisors don’t have much more success stopping their clients from doing the wrong thing at the wrong time. Otherwise you wouldn’t have all those investors that sold at the bottom in 2008-2009, or in other bear markets. Advisors don’t have more success in that area. So even if you assume all things are equal, the investor is better off paying .15% than 1% or more to the advisor.
Their .15% fee is so miniscule it is worth the labor it saves me. My time is worth more than that.
But Tom, you just said that you’ve been in the business 30 years. Most investors haven’t. So they NEED human advisors to help them. I would say that virtually NONE of my clients (most are over 50) would even consider a robo-advisor. Most probably haven’t even heard of the names (Betterment, Wealthfront, etc.). A handful have had assets at Vanguard, Schwab, and Fidelity, but have become disenchanted byt eh turnover and lack of “customization” of their advice. In other words, my clients work with me because I KNOW them and I KNOW their situations. Even if you call “your guy” at Vanguard or Fidelity, they could be as knowledgeable about investments and advice as me, but they still have no idea what their client needs, because they rarely talk to them, and likely have thousands of other clients they deal with.
Good points, especially about “the guy” at Fidelity or Vanguard. Maybe just the self directed investor would feel like I do.
I don’t think B2C robo-advisors will completely go away especially with the DOL ruling. If anything I believe it will increase their AUM and hurt high-fee traditional advisors. Many traditional advisors won’t touch clients under a specific size where will they go for their guidance then?
Schwab, TD Ameritrade, Fidelity, and other online brokerage retail brands have solutions for this, and have for 15 years. They already manage the bulk of the self-directed investor marketplace, and will continue to do so.
And recognize that the “traditional” advisors serving this marketplace weren’t giving advice to this marketplace in the first place. They are/were brokers, selling products for commissions, and just writing “financial advisor” on their business card. Given that virtually no advice was occurring already, transitioning to a retail direct-to-consumer brand, with a retail presence and retail financial consultants, along with online capabilitiies for self-directed or managed accounts, will be an easy transition. And again, that’s actually where the bulk of the assets and clients who need this kind of help are ALREADY. They’ll just grow more.
– Michael
Michael, do your stats only measure assets in and out or are they based on the change in AUM from one year to the next. If the latter, I wonder how much of their slowing growth is due to lower rates of return in 2015 vs. 2014. Another question….how does Robo’s 2015 growth rate compare to the 2015 growth rate for the entire RIA industry?
I hope Mike answers this. You bring up a good point. It seems like the decline nearly mirrors the decline in the stock market. Should clear up any confusion.
Alan,
This was based on net change in total AUM from one reporting date to the next. Available filings don’t delinate out what is net flows vs return on flows.
That being said, for companies who are trying to scale growth at 10% PER MONTH, market returns were NEVER going to be a very material factor here, as even long-term equity returns average less than 1%/month (or 1/10th the growth rate from a year or two ago).
For “normal” RIA growth targets that might be 15% per year, market returns are a HUGE component of that. For startups trying to scale at 10%/month (which would be growing over 210%/year with monthly compounding), those market returns are a fairly trivial tailwind effect.
– Michael
Michael,
Good point. What was the average growth rate in AUM for RIAs in 2015?
This means what exactly: “Betterment’s pivot into a 401(k) space that clearly needs some structural improvements!)” Why? Why does anyone think that an entire new recordkeeping platform needed to be built? Deferrals come in, trades are processed, updates are reflected in participant balances. A number of recordkeepers have updated their cosmetics with a fresh modern look. So thats a wash.
That is not remotely the issue with 401k plans. The issue is Paychex and ADP receiving millions in revenue sharing from the pay to pay funds on their platforms, providing no fiduciary services to the sponsor or participants, and gouging small businesses on setup and conversion fees.
The issue is brokers placing plans on Hancock, Transamerica, Nationwide, American Funds, Mass Mutual, Principal, Empower etc, where the participants are paying needless and excessive fees so the fund companies, insurance companies and brokers can line their pockets at the expense of an unknowing public.
Betterment has hired people to sell 401k plans that 3 months prior were not even in a related business. No expertise at all in plan design…Just promoting a little boxed up one size for the most part solution.. Good for maybe a startup 401k plan that does need much more, perhaps. From a distance it looks like a reason to spend more of their VC on another line of business because the core line with average small balances, albeit many of them, plus the cost of nice TV commercials, is not producing the revenue like was mentioned as compared to Personal Capital.
I don’t think any investors (ie. VC investors) were deluded into thinking that Betterment would ever be profitable enough to generate a return on their investment. I think behind the scenes, there has almost always been a strategy of selling themselves to a larger firm once they achieved some reasonable scale, and became attractive (as a technology and a marketing channel for new clients) to a larger firm, like an insurer, mutual fund company, or bank.
On another note, I think the “average account size” dropping is just a function of the fact that much of the initial client seed money was raised by founders, followers, and investors in the firm, who put up some of their own money into Betterment accounts (and Wealthfront, etc.) to get the ball rolling.
“Vanguard’s Personal Advisor Services offering a full financial planning solution for a 0.30% cost that’s barely above the price of a robo-advisor’s investment-only service (and includes not just automated investing but a personal financial advisor as well!)”
VPAS isn’t “automated investing,” they don’t have automatic rebalancing, automatic TLH, or check portfolios nightly for new cash additions, like the other robos do. I love that Vanguard offers a human advisor for 30 bps, but always chuckle when authors incorrectly label it a “robo” or “robo-hybrid.”
It’s a human that reviews the portfolios quarterly. They use mostly MF and will incorporate ETFs if asked.
Comically, I spoke with a Vanguard “Consultant” today regarding their VPAS (doing some market research). He was quick to point out to me that Vanguard has “always operated as a Fiduciary for their clients” while “no other advisors have ever been held to that standard”. I asked about CFP’s and RIA’s and he reiterated, “no, they only had suitability requirements, but we act as Fiduciaries”.
What is losing grounds is the first original version of Robo Advisors. Pure internet no human interactions, just Etf.
Segment is evolving into a more sophisticated approach: human+digital, broader investment solutions, multichannel, also educational.
Like Yellow Advise from CheBanca! , the first B2C digital advisory wealth management platform from a Bank in Europe.
Really well structured conversation but I so so so disagree .. the p/e funded pioneers may go away like most of these digital pioneers (prodigy consumer financial network anyone!) but there is a compelling need for direct to customer investment and even insurance advisory services that are delivered at a more affordable cost plus an argument that “machines” can outperform half of the professionals in any industry plus an even more compelling argument that a “bionic advisor” backed up by robos and machines will outperform a non equipped advisor.
We have seen this is so many areas and we should have learned the lessons well funded innovators, some live, some die, the industry movement stalls periodically (I am someone who bought his amazon stock in 2001’ish at $38 and “brilliantly” sold 8 months later at $42 for a massive 10% upside).
I agree with the points of acquisition costs vs todays leveraged funding models but the mass market services is one of cost of service vs return and new operating models enabled with digital technology will solve that (ask any retailer who has faced wallmart over the past 40 years and any wallmart executive facing amazon)
I am passionately helping drive this revolution because it will benefit the customers, the best investment and insurance advisors (only overpaid underperformers will go away) and the country as a whole. I was around the vanguard launch and the post launch bar talk of the pundits (not Vanguard employees ) was “1m wealth employees will go away and it is possible no one will really notice in terms of national wealth, stock market performance or consumer spend from boomer retirement funds.
I think schwab is as much focused on RIA enablement and that is a powerful direction. However the smart RIA’s will quickly give the tools to their customers and be “alongside” the robo experience.
I have a nice preso that shows the tech dirven evolution trading markets since 1970 from guys (mostly guys) waving paper in coats on the LSE and NYSE to traders working on a computer (phone jammed to ear) to trading desks with multiple computers to traders watching the trades and intervening to the trading floors of today with paper blowing in the breeze and 70% of all global trades initiated by and controlled by and reacted on by computers with no people.
It is coming .. the trick is how we can be inn the top 20% of professionals.. As we see in the 1% political arguments especially in America a disproportionate share of the rewards go to the top %%%
And if you think this is bad look at the stocks that have grown over the past 30 years and why .. and ask a 60 year old GM worker how s(he) feels about all those robots!
Fantastic article,.. the same pattern is emerging in Australia, a bunch of fintech’s about to be swamped by the majors before reaching critical mass,
I’ll be tuning in to more Kitces analysis from now on…