fee for building portfolios based on ahighly simplified risk tolerance profile,placing investors in accompanying models of low-cost ETFs and rebalancingthem along the way, all through automation and algorithms.
On the surface, this approach mimicked what human advisors weredoing. But the VC-backed robo-advisors never did gain muchtraction, and they were eventually eclipsed by the veryincumbents they were tryingto disrupt.
“Wealthfront is really justE-Trade with an expensivecoat of paint!” Aaron Klein,CEO of Riskalyze, famouslytweeted. This simple statement put in perspective thatit was all really just a segmentation scheme, as early adopters of therobo-advisors were do-it-yourselferswho have always been attracted tolow-cost options, and not clientswith significant wealth and morecomplex needs that human advisorshave typically served.
Ultimately, there were no barriers to entry, and industry incumbentssuch as Schwab, Fidelity, Vanguardand even Merrill Lynch were able toquickly launch similar functionality,but with a devastating twist — theyoffered it “free.” Thus, the VC-backeddisrupters were ultimately disruptedby the incumbents they were tryingto displace.
This leadership transition to the
large online brands created a strate-
gic shift for the early robo-advisors,
as many of them pivoted to business-
to-business platforms and actually
supporting advisors with back-office
automation, or were acquired by legacy
companies and asset managers as a
distribution play. Their days as direct-
to-consumer investment platforms
were fundamentally over, with just
Wealthfront and Betterment surviving
as independent entities.
In a further irony, both of these original players also have pivoted to othervenues outside of investing, most notably to offer banking services. No longercompetitive with “free” robo-advisorsfrom well-resourced and branded players such as Schwab and Fidelity, theyneeded to find other ways to make aliving and have successfully done so byharvesting cash.
But give credit where credit is due.While the original robo-advisors ultimately haven’t been successful, theydid ignite a digital movement in wealthmanagement. There is expected to bemore than $1.3 trillion in robo-advisormanaged accounts this year, with a compound annual growth rate of more than
20% year over year.
Additionally, the elegant user interfaces and simplified, automatic accountopening that the robots introduced weretotal game-changers. Wealth management technology had been lagging inmodern, consumer applications; afteryears of underinvestment, those gapswere beginning to widen.
Clients were starting to notice as well,
adding to the pressure for firms and
advisors to deploy these innovative new
features. Most notably, client portals,
mobile applications and digital account
opening became the No. 1 new technol-
ogy investment advisors and the firms
that support them began making. The
industry still has quite a bit of catching
up to do, but credit the robo-advisors’
digital movement for accelerating these
Another key change that the robos
brought about was helping advisors
better articulate the value
that they provide outside of
investment results in terms
of behavioral finance issues,
hand-holding, empathy and
being there for investors in
times of chaos and change.
People are funny about
money and want to talk to
another person to help them
with the very personal issues
around finances, achieving
lifelong goals while protect-
ing their families. Indeed, today there
are new professional designations that
advisors can obtain around behavioral
finance and related issues.
Robo-advisors continue to improve.
With the promise of AI, machine learn-
ing and other predictive technologies,
their algorithms will be able to provide
more tailored advice, further accelerat-
ing the commoditization of investing.
And human advisors will be able
to leverage these new tools and pro-
vide another positive step in elevating
humans from a low value-added role to
one of importance in their clients’ lives.
As a result, the great robo-advisorexperiment continues and will beplayed out in the ongoing digital transformation of the industry. Despite itscomplexities and reputation as slow-moving, the wealth space is resilient andadaptive to change.
Timothy D. Welsh, CFP, is president, CEO andfounder of Nexus Strategy, LLC, a consultingfirm to the wealth management industry. He canbe reached at email@example.com or onTwitter @NexusStrategy.
The world domination goal
of the VC-backed startups
was not realized; however,
they did ignite change that
continues to reverberate
across wealth management.