Low rates topple cash yields for robo-advised clients

Banking products attracted billions of dollars in assets onto digital wealth platforms in the past year — including at some advisory firms with household names, such as Carson Group and Personal Capital. None of the new products have been more successful, however, than the high-yield savings accounts that have helped Betterment and Wealthfront catapult assets over the $20 billion mark.

Wealthfront said in September that the product helped the robo-adviser double its assets last year and pulled in more than $1 billion in its first month. Not to be outdone, Betterment said in March assets topped $22 billion due in part to adding cash management tools last year. 

Economic fallout from COVID-19, however, has upended some of that success. Falling interest rates knocked yields from 2%-plus down to just basis points. Those yields put digital firms on par with competing offers from traditional banks.

After gaining a leg up by adopting new banking technologies, digital wealth managers may be forced to reinvent themselves again in light of the recent stock market downturn.

“The ‘rate bait’ trend may have run its course,” said William Trout, head of wealth management at the consulting firm Celent. “Robo-advisers were doing a nice job pulling in cash before the market began to crater. ”

While Betterment and Wealthfront do not break down assets held in savings accounts, Personal Capital, said it had amassed over $360 million in deposits in approximately 20,000 accounts since launching last year.

“The recent rate cuts by the Federal Reserve have been drastic and impact nearly every financial institution,” said Personal Capital spokesperson Porter Gale. “There is more to a cash management account than just yield.”

Wealthfront spokesperson Kate Wauck agreed that the interest rate is just one of the features clients find useful. “We're still seeing growth in new clients coming in through the cash account as well as new deposits and additional deposits from existing clients,” she said, adding the accounts come with FDIC insurance.

The Palo Alto, Calif.-based robo-adviser listed managed assets at approximately $13.5 billion, according to its latest ADV filed in February. The company claims to have some 400,000 accounts with assets of more than $23 billion — meaning cash accounts may make up part of the difference.

The recent market volatility brought on by fears surrounding COVID-19 has also steered some clients away from equities and into safer savings accounts, said Betterment spokesperson Danielle Shechtman. Given the recent volatility, some clients have temporarily diverted investment deposits into the firm’s cash account, she added. 

“The ongoing pandemic is causing a very unfortunate financial situation for many people,” Shechtman said. “Unlike the 2008 crisis, however, there are more banking options for people trying to avoid being nickel-and-dimed, including our cash accounts.”

The marketing allure of offering eye-catching rates may have receded, but the COVID-19 pandemic may have opened up other avenues to attract clients, said Eric Sandrib, an analyst at Aite Group. Some digital platforms have actually reported an uptick in new client accounts, he said.

“Investors who have been thinking about using a robo-advisor to invest for some time, have had idle cash on hand while awaiting a bear market,” Sandrib said. “Now, is an opportune time to fund those accounts.” 

Overall assets managed by robos surged in 2019, according to research from consulting firm Aite Group. The total market is expected to reach $1.26 trillion by the end of 2023, however, robo-advice assets totaled only about $283 billion in 2019. Independent robo-advisers — like Wealthfront and Betterment — may also be squeezed by new entrants from traditional financial services firms like Vanguard and Schwab, according to the research.

Marcus by Goldman Sachs, for example, launched new digital banking products last year as part of a plan to generate $5 billion a year in additional revenue by this time next year. The current yield on a Marcus savings account is 1.7%.

A number of digital platforms at traditional firms have already slashed fees and account minimums in an attempt to remain competitive in a crowded marketplace. This week, Wells Fargo slashed fees for its Intuitive Investor to 35 basis points and cut account minimums to $5,000. Upon initial launch, the minimum investment was $10,000 with a 0.50% advisory fee. 

The big banks may be better positioned to offer high-yield accounts, because the firms typically have cash on hand, Trout said. Those firms are also seen as more stable by consumers. Big banks — with an associated charter, FDIC insurance and brand recognition — generally translate into market share.

“It's amazing how quickly the shiny new objects [high-yield savings rates] have receded into the rearview mirror,” he said. "It’s a small tragedy and a missed opportunity.”