Robo Advisor Growth: A Changing Financial Market

Robo Advisor growth has rocketed out of all proportion in recent years. But what are robo advisors and how are they changing investment banking?

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The population of the globe is changing. Millennials have been held to blame for many global shifts. Perhaps the biggest change in banking that has been blamed on them is the rise of the Robo Advisor and general Robo Advisor growth.  Once upon a time investors placed their trust in personal connections. But robo-advisors have been increasing in popularity over the past several years. $290 million was invested in them in 2014. This is double the amount of the previous year, and more than eight times that of 2012. Between them, Wealthfront and Betterment drew in almost three and a half billion dollars in 2014. The money managed by Wealthfront is growing by 52% year on year. Robo Advisors are seemingly here to stay. Predictions suggest that 5.6% of all US investments will be robo managed by 2020. To put that in perspective: in 2015, that percentage is 0.5%. But it looks like Robo Advisors are the future. Even in a fairly flat market, assets in the first half of 2015 were up 34% since the previous June. And robo advisor growth is continuing.

This doesn’t mean traditional banks are a thing of the past. On the contrary, banks such as USAA, Citi, BBVA and JP Morgan have been partly responsible for funding some major robo advisory companies.  JP Morgan and Goldman Sachs  took part in funding rounds for Motif Investing to the value of $25 million and $35 million. Investing in this way is one of the routes banks are currently taking to get in on the Robo Advisor growth action. CitiVentures have provided funding for Betterment. USAA, BBVA and Blackrock both took part in major funding rounds for Personal Capital. But this is not the only way for banks to engage with the Robo Advisor growth market. Blackrock has been working with the Robo Advisor market in more ways than one.

In 2015 Blackrock bought FutureAdvisor intending to farm out its services to banks. Fidelity Institutional Wealth Service has been working with Betterment to help clients maintain their RIA portfolios. Power Financial Corp has partnered with Robo Advisory company Wealthsimple. Banks that don’t want to partner up with existing companies haven’t been left out either. Many have developed robotic platforms of their own to compete with Robo Advisor growth.

These platforms entered a major phase of development in 2015. This started with Charles Schwab’s introduction of Schwab Intelligent Portfolios in March. This is a platform without any fees. It manages portfolios and offers tax loss harvesting. Vanguard rolled out a service in May that combines robotic with human advisors. These people can be contacted over the phone, offering a bridge between the old world and the new. ICICI Securities launched a platform, Track and Act, in October of 2015. This followed InvestCube. This is National Bank Direct Brokerage’s new online service. It provides investors with a range of five ETF portfolios at various levels of risk tolerance. National Australia Bank also got in on the action in September 2015. They targeted first their own existing customers. Bank of Montreal launched a similar platform at the end of 2015. This is still in its early stages but taking up a position alongside many similar companies in a new and thriving market. An interesting future is forecast for robo advisor growth.

So: What is Driving Robo Advisor Growth? 

There are several factors driving robo advisor growth. The support of Generation Y is a major one. These are customers who have grown up exposed to the internet. They are looking for investment advice at low or no cost. Robo Advisors can certainly appeal to this market.

Low fees is perhaps the biggest draw of the Robo Advisor. Fees of 25 – 50 bps rather than 250 – 300 bps have really helped the market to expand.  The automated process also proves appealing particularly to younger clients. The entire process can happen without engagement with another human being. Investments can be made and maintained from your own living room.

Traditional investment also requires higher minimum investment. Robo Advisors allow clients to invest even when they are not high earners. This means that the once-restricted world of financial investment is open to many more people. Automatically the market has been broadened. Robo Advisory services are also very easy to enroll in.  They require only basic information such as age and risk profile. Financial goals and the duration of investment also come into it.

So, what is holding Robo Advisors back?

It’s clear that there are many attractions to the Robo Advisory network. But they haven’t taken over the market entirely just yet. There are certainly reasons for that. In the first place the lack of human contact is still a barrier for many people. Robo Advisors also are mostly limited in the investment options they can offer. This means the scope for risk variation is smaller.

At the moment most banks are still not threatened by the increasing wave of Robo Advisors. Robo Advisory firms are operating with a total AUM of $19 billion. This seems like a huge number until you compare it to the $7 trillion of total assets managers. But banks are clearly not ignoring the potential of Robo Advisors either. We can see this from the fact that so many have begun to open their own Robo Advisory platforms and partner with existing ones. The world of investment is changing and the pace could be moving faster than anticipated.