Robo-Advisors: 5 Predictions for 2016
According to a study by Corporate Insight, from April 2014 to July 2015, the top robo-advisors — or automated investment services as many prefer to be called — went from $11.5 billion to $21 billion assets under management.
With these new firms attracting more investors and with the industry continuing to mature, there will be many changes that impact the robo-advising market. Here's what we're likely to see in 2016 and beyond. (For related reading, see: What's the Next for the Robo-Advisor Space?)
Legacy Firms Go Robo
As the robo-advisor industry grows it will continue to attract the attention of established financial services firms. These corporations want to offer what their clients want — easy money management — while at the same time attracting more funds to manage. Right now they are losing dollars under management to the upstart robo-advisor firms. Since the amount of money under management determines how much money firms can make, they will pay attention to why they are losing out on new investment dollars.
Just in the past year, Fidelity Investments, Charles Schwab Corp. and The Vanguard Group have either created their own digital services unit or partnered with an existing pureplay robo firm. You can expect the other large firms to join the trend.
Increased Types of Investment Options
For a majority of the existing robo-advisories, their existing offerings are index-based, with most using exchange-traded funds (ETFs) as the main investment vehicle. They work by ensuring you have the right asset allocation for your goals using index funds. Some of them then also use tax loss harvesting as a way to increase returns.
As a way to gain a competitive edge in an increasingly crowded market, robo-advisors will start offering options beyond their original premise of digital money management. You may end up seeing things such as portfolios based on different analytical strategies using technical analysis and smart beta. Companies will use these investing options to try and make their services more attractive to those that want to beat and time the market but still don't want to actively manage their own portfolio. (For related reading, see: Robo-Advisors' Next Frontier: 401(k) Plans.)
The Flip Side
One trend that will likely coincide with robo-advisors' evolution is bad investment options. We should expect to see upstarts or existing companies start offering robo services at really high fees. We will also probably see this paired with bad investment choices that have additional high fees and hidden fine print that will lock clients into contracts.
It's no different with index funds that charge more than 1.0% for the same thing you can get for 0.06%. Such funds are still in business because people get pressured by aggressive salespeople to put their money there or they don't take the time to understand what makes a good investment. The type of companies that run these funds can be successful by trumpeting a trend and preying on uneducated consumers.
Mergers, Acquisitions and Closures
Depending on the source you look at, it's estimated that there are now about 200 robo-advisor firms out there, many which don't have a lot of assets under management. With the field this crowded, expect to see closures, acquisitions and mergers. The pace of turnover in the market may be fast given that robo-advisors tend to have smaller margins due to the lower fees they charge. And in terms of survival of the fittest, it will probably be difficult for independent robo-advisors to gain enough traction to make it on their own.
The consolidation is already happening — BlackRock Inc. recently bought Future Advisor and Northwestern Mutual Life Insurance bought upstart online money manager LearnVest. (For more, see: Why Schwab Launched its Robo-Advisor for Advisors.)
More Options for Personal Advice
Robo-advisors work well for clients without major life changes on the horizon and for those who don't need additional services such as estate planning. Robos take all the stress out of getting the right asset allocation and investments; they also maintain them without too much cost.
However, as investors reach stages in their life where they need more personalized advice to work through decisions — buying a home, saving for college or getting ready to retire — they will need access to more than just a computer program.
This is where the robo-advisor firms will begin to add human advisors to assist with more complicated issues. This might mean a higher fee to access a dedicated human advisor, or it could mean that clients pay for one as more involved advice is needed. The market's natural evolution will result in traditional human advisors enhancing their practice by pairing up with a while label robo-advisor to offer the automated investment services; premium services that require a dedicated financial advisor can still be offered when needed.
The Bottom Line
Robo-advisors are here to stay, but the services will continue to evolve to meet the demands of younger investors over their lifetime. This will include increased services for when they are needed and more investment options. With an increase in competition, you will see these things become a big part of the mix. (For related reading, see: A Guide to Choosing the Best Robo-Advisor.)