Robo-advisers had many traditional advisers shaking in their boots when the online platforms first stepped onto the financial industry stage. But these days, some automated investment advisers aren't looking as strong as they used to.
In fact, most of the successful robo-advisers have some sort of traditional adviser component to them. Examples include Betterment Institutional and Motif Advisor, white-labeled platforms geared toward advisers; Personal Capital and Vanguard Personal Advisor Services, both of which are hybrid platforms with a human element; and Schwab Institutional Intelligent Portfolios, the adviser-facing version of Schwab's retail robo.
Other platforms, focused more on the consumer side, have plateaued.
Historical Form ADV data from September 2012 to September 2015 show that Betterment quickly picked up assets under management last fall after announcing that it had
created Betterment Institutional for advisers to incorporate into their own practices. Personal Capital has remained strong, while some other automated investment platforms have remained constant, neither growing or losing their client base.
"Many robo-advisers pivot to also service this adviser landscape and not just direct-to-consumer," said Matt Fronczke, an analyst and engagement manager at kasina. "When you are going to the business-to-consumer landscape, the competition is intense."
In response to this competitive landscape, the industry has seen some robo-advisers already get picked up in big-firm acquisitions.
BlackRock acquired FutureAdvisor at the end of August;
Envestnet bought Upside earlier in the year; and
Vanare scooped up NestEgg last December.
Other robo-advisers have launched institutional platforms, such as Hedgeable and Jemstep. The latter was a consumer-facing online investment platform before shifting its focus and revamping its software to enable traditional advisers to build their own robos.
"There are really very few [exclusively business-to-consumer robo-advisers] left," said Raef Lee, managing director and head of new services and strategic partnerships for the SEI Advisor Network. "There's been a shakeout."
Wealthfront, one of the older robo-adviser startups in the industry that is now essentially neck-and-neck in AUM with Betterment, is one of the few truly business-to-consumer platforms still standing. The Silicon Vally-based automated investment service has shown no signs of budging from its investor-centric business model. The company did not respond for comment.
Mr. Lee said that there will be one or two purely consumer-facing robos able to survive, but it will be contingent upon which can ramp up their AUM and lower their client-acquisition costs. Soon, the venture-capitalist backers will be asking for returns on their investment.
"In the next few years they need many more than $2 billion to start being profitable, so I think that is a real concern," he said.
Actually, some believe that they'll need a lot more than that.
A recent research report by Cerulli Associates found that robo-advisers, which the report refers to as electronic
registered investment advisers (eRIAs), on average will need to grow by 50% to 60% per year for the next six years to attain $35 billion in AUM. That's the baseline researchers feel that each automated investment platform will need to attain to remain successful with a direct-to-consumer business model.
"These firms grew at a fast rate, but still have very small bases compared to traditional firms," said Frederick Pickering, a research analyst at Cerulli, and Scott Smith, a director at the research firm, in an email. "The largest startups have between $2 billion and $3 billion compared to more than $1 trillion at a firm like Merrill Lynch.
"The distribution potential of traditional providers is much stronger given their existing client base and brand recognition," they said.
That's why robo-advisers from companies such as Charles Schwab & Co. and Vanguard have been so successful. Schwab's Intelligent Portfolios
raised more than half a billion dollars in just three weeks, while Vanguard Personal Advisor Services had $17 billion in assets
by the time its pilot program ended and it officially launched in May, boosted significantly by rollovers from some existing client accounts.
It's quite hard to compete with the brand recognition and marketing muscle of such behemoths, experts say.
"Asset gathering is the fundamental growth challenge of any wealth management provider," Mr. Pickering and Mr. Smith wrote in an email. "Firms which employ human advisers should be able to leverage their existing marketing schema as well as opening new avenues to complement their evolving online resources."
Robo-advisers are trying various tactics to achieve continued growth in the consumer-facing channel. Wealthfront and Betterment both aggressively market their platforms on various media, such as ads on television and Facebook, as well as out-of-home advertising in train stations and taxi cabs.
"They are advertising like crazy to create a brand," said Tomas Pueyo, vice president of growth at SigFig.
Although SigFig mostly focuses on consumers, Mr. Pueyo said that it does partner with financial institutions, and he sees that being the trend the market is moving toward.
Others do not agree. Jon Stein, the chief executive of Betterment, said that providing better advice to consumers will always be part of the firm's mission. However, the company has always had a vision of incorporating other branches to its business, such as the institutional platform and now the
retirement side.
"Everyone sees big changes are happening," Mr. Stein said. "This is where the business is going."
Mike Kane, the chief executive of Hedgeable, agrees. He said what will make certain robos disappear is their lack of innovation.
"This is no different than any other market: It is either innovative or die," Mr. Kane said. "You can't charge for commoditized products."
He suggests that robo-advisers will have to find something unique to offer. For Hedgeable, that includes downside protection and alternative investments. And it will keep adding more tools, too, he said.
"What's going to happen is there is going to be consolidation," Mr. Kane said. "No one really knows the difference now between some of these guys, because they offer the same thing."
And, as many argue, algorithms won't be able to provide the same resources that humans can.
"It can't help investors address life's difficult milestones like planning for their kids' college expenses, purchasing property, starting a business or determining the best asset allocation across all of their various retirement and savings accounts," said Bill Harris, chief executive of Personal Capital, which has a hybrid model that employs traditional advisers in addition to its online platform.
"Everyone's situation is unique," he said. "And when it comes to life's complex financial situations, the human touch is irreplaceable."
