The rise of robo-advisors — online wealth management solutions that provide automated portfolio advice — has been rapid. While they still represent a relatively small percentage of the total assets under management by financial advisors, they have become more mainstream and have shown an influence on the financial advisor landscape.

Looking to the future of what’s next for robo-advisors? Here are a few thoughts. (For related reading, see: How to Evaluate a Robo-Advisor.)

Everyone's Getting In ...

More and more traditional financial services firms are toeing the robo-advisor (or digital advisor) waters. This past year has seen The Charles Schwab Corp. launch its Intelligent Portfolios robo-service along with an institutional version for use by financial advisors. Northwestern Mutual Life purchased online financial planner LearnVest. BlackRock, Inc. purchased digital investment manager FutureAdvisor. And robo-pioneer Financial Engines, Inc. announced its acquisition of brick-and-mortar financial advisor the Mutual Fund Store.

This is likely the tip of the iceberg in terms of the embracing of digital advisor technology. Take Vanguard, whose Personal Advisor Service has been very successful managing more than $21 billion in AUM. The 30 basis points Vanguard receives is on top of any money the firm garners from the expense ratio of the underlying mutual funds and ETFs used to implement any of its financial advisors' recommendations. By its own admission, Vanguard mostly uses its own products when implementing client investment strategies under this service.

On the pureplay robo-advisor front, there are many startups gaining steam, but only a handful are actually managing significant assets. At some point some of these firms will likely go by the wayside if they don’t grow and if their funding dries up. In some cases, it is conceivable that either the traditional financial services providers mentioned above or the more successful robo startups — such as Betterment and Wealthfront might look to buy smaller competitors if there's a strategic fit. (For related reading, see: Why Schwab Launched Its Robo-Advisor for Advisors.)

... Because the Water's Great

An industry study indicates that about 8% of the top financial advisory forms currently offer some sort of robo-advisor service, with an additional 20% of the traditional advisory firms looking to do so over the next couple of years. 

Part of this trend might be an effort to combat the growth of robo-advisor upstarts, but another reason might be to reach a new audience — one that appreciates the lower cost level of service and one that might not need a full-service relationship with a traditional financial advisor.

A properly built robo-model is in fact a viable way for traditional financial advisors to effectively work with clients who may not fit the primo description of an ideal client for traditional advisor services. Using a robo-platform to augment full-service models is a good strategy to capture younger Millennial and Gen X clients who may not have the assets to justify splurging on human advisors and complex financial products. These are groups who stand to be the recipients of a huge transfer of wealth from their Baby Boomer parents and grandparents over the next 20 years. Starting a relationship with these folks sooner rather than later and delivering quality service and advice in a scaled-down setting can position advisory firms to be the go-to firm for these investors as their wealth increases and they move their careers. (For related reading, see: A Guide to Choosing the Best Robo-Advisor.)

Robos as Distribution Channels

Many robo-advisors use exchange-traded funds as their primary investment vehicle. To my knowledge, most independent robo-advisors don’t have arrangements with any one ETF provider, but it's safe to assume they're receiving communications and visits from major ETF providers like Vanguard and BlackRock.

Further, Schwab’s Intelligent Portfolios focuses on using its proprietary products in line with giving advice as does Vanguard’s Personal Advisor service. To the extent that these services pull new clients into these firms, it must translate into additional assets into their products.

Money manager BlackRock was very open about its purchase of robo-advisor FutureAdvisor—it bought the upstart for the technology. Further, BlackRock said it wanted to use this tech to offer a robo-platform for traditional financial advisors in channels that are underserved; presumably these advisors would use BlackRock products such as iShares ETFs on this platform. (For related reading, see: Can You Really Trust a Robo-Advisor?)

Entering New Markets

A significant percentage of financial advisors right now are in their 50s and will be retiring over the next decade. Only about 5% of all financial advisors are under 30. This could create a shortage of qualified financial advisors for folks who might want to engage such services. Robo-advisors can fill part of this void, especially the hybrid services that combine technology with a human touch

Another market that's ripe for robo-advising is the 401(k) sector, which so far has been largely untapped by automated technology. RIA Blooom is an upstart zeroing in solely on 401(k) management. According to a Blooom spokesperson, “after the client provides some very general information about themselves, identifies their 401k provider and provides their credentials to the account there is nothing left for the client to do.”

Personal Capital and Smart 401(k) also offer 401(k) advice, focusing on individuals.

Starting early this year, Betterment will be offering a 401(k) plan directly to plan sponsors using the investment algorithms and methodology used with individual clients. Its all-in costs will be low; it's essentially offering a plan comprised of managed accounts based on the needs of each individual participant. Presumably, if Betterment is successful, other robo-advisors will follow and perhaps even some traditional 401(k) providers will start to offer a similar service.

The Bottom Line

In terms of assets under management, robo-advisors are not yet a significant player in the financial advisor landscape. However, their impact on the industry has made a crater of an impression and many traditional financial advisory firms have embraced the technology in one way or another. Expect to see much more integration of this digitization into the mainstream financial advisory world moving forward. (For related reading, see: What's Next for the Robo-Advisor Space?)

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