Only about one-third of Americans maintain a budget or have a long-term financial plan, and less than 20% of investors rebalanced their portfolios in 2014. If given the option to forgo the mundane details of money management, it’s fair to say most people wouldn’t think twice.
Robo-advisors, which manage customer investments using computer algorithms for a low fee, make that not only possible, but in some cases financially prudent.
You’ve probably heard the big names in this group — the likes of Betterment and Wealthfront — but by some estimates, it’s a movement 200 firms large. Though many of those have few to no assets under management, the industry as a whole has grown substantially over the last year or so, hitting $21 billion in assets in July 2015, according to research firm Corporate Insight.
About 15% of those dollars are housed with Betterment, which has emerged as the current leader of the independent robos. The company had $1 billion in assets under management in January 2015; it currently manages $3.2 billion, passing once-front-runner Wealthfront. That growth isn’t letting up.
“We want to help tens of millions of people,” says Jon Stein, Betterment CEO. “That thing that you want that manages your money intelligently for you? That’s the advisor we’re building, because we want that same thing too.”
Here’s what to expect from the industry in 2016:
1. Minimums will continue to move lower
In addition to assets, Betterment is also attracting people, with a customer base that’s twice the size of all of the competition combined, according to Stein. It’s easy to chalk that up to its $0 account minimum, and Stein acknowledges that some of Betterment’s accounts are small. But he says all of the customers counted in that tally are saving into funded accounts, with most putting away a “considerable amount.”
That minimum — or rather, the absence of one — has put the pressure on other advisors, many of which have dropped their own minimums over the last year. Personal Capital, which has $1.8 billion in assets under management, recently lowered its account minimum by an ambitious 75%, dropping from $100,000 to $25,000. The company may be able to get away with a minimum still in five digits because its clients also get a dedicated financial advisor.
TradeKing Advisors has lowered its minimum twice. It launched its two tiers of service with initial deposit requirements of $10,000 and $25,000; those minimums now sit at $500 and $5,000. The company’s CEO, Rich Hagen, told NerdWallet that minimums were lowered in part to remain competitive.
And in July 2015, Wealthfront lowered its account requirement from $5,000 to $500, noting in a blog post that it was responding to a “surge in demand” from young customers. Those customers no doubt wanted to take advantage of Wealthfront’s generous pricing structure, which manages the first $10,000 completely free. (Betterment charges 0.35% on accounts under $10,000 that agree to a minimum $100 monthly auto-deposit; those without auto-deposits are charged a monthly fee of $3. That $3 a month — which amounts to more than 7% annually on a $500 balance — has been a point of contention between the two advisors, including a public war of words on Medium.)
“Will there be a race to zero? We think some firms will continue to lower minimums in order to try to acquire clients, but it’s going to depend on the size of the institution and the target client,” predicts Sean McDermott, a Corporate Insight analyst.
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2. More brokerages will launch robo offerings
The $21 billion industry figure from Corporate Insight doesn’t include existing brokerage firms that have added a robo arm, such as Vanguard’s Personal Advisor Services and Charles Schwab’s Intelligent Portfolios. Both of those services combine robo algorithms with human advisors.
Vanguard’s service alone had $26 billion in assets under management at the end of September 2015; $10 billion of that is transferred assets from the company’s legacy advice offering, but the other $16 billion is new.
That kind of success has other brokerages angling to get into the game, McDermott says. “The tipping point was really Schwab and Vanguard; they were the canary in the coal mine. The asset growth was fairly impressive, and that caught the attention of competitors,” he says.
Fidelity is currently internally testing a service called Fidelity Go. The company hasn’t yet released details about fees or an official launch, though it’s been reported that select customers will be invited to test the service early in 2016. Morgan Stanley and Wells Fargo Advisors have hinted at possible robo offerings as well.
McDermott says that as more of these brokerages enter the field, there will be a greater sense of urgency for their competitors to stay on pace and match them.
3. Your 401(k) could improve
In September, Betterment announced a 401(k) offering for employers called Betterment for Business, which is slated to launch in January.
The company was the first major robo-advisor to enter the market. Stein says he expects others to follow, and current providers to improve their offerings in response to that competitive pressure.
“You could think about this as kind of a classic innovator’s dilemma,” says Stein. “We’re coming to the market with a different proposition, focused around advice, that is lower cost and does things in a different way than a typical 401(k).”
That means participants will be invested in a globally diversified portfolio of exchange-traded funds (ETFs), the investments used by Betterment’s consumer offering and by most robo-advisors. Betterment for Business 401(k) investors don’t have access to other options common in 401(k)s, like actively managed mutual funds — including target-date funds — or company stock.
“Those are generally not great things to have in a 401(k),” Stein says. “But that doesn’t mean it’s going to be easy for [incumbent] providers to get rid of those features. They’ll iterate on top of the platforms they already have, providing advice. It’s going to be hard to fundamentally disrupt themselves.”
One advisor, Blooom, has long catered to 401(k)s — not as a provider but by managing the accounts of individual employees through their existing 401(k) plans.
4. Robos won’t charge less, but will offer more
Robo-advisors came into the market on the premise of low fees, and there isn’t a lot of room for movement there, McDermott says. Most charge a fraction of what a human advisor would. Rather, these companies will up the ante on features to stay competitive, something we’ve already seen over the last year.
In January, Wealthfront launched tax-minimized account transfers, a product that does exactly what its name implies. Personal Capital offers a slew of account tracking and financial planning tools on its site, available for free to even those who don’t invest with the company (and used to track $187 billion in accounts, it says).
For Betterment’s part, a portion of its success was the launch of its institutional offering, aimed at financial advisors, McDermott says. “We certainly think it’s not a coincidence that less than 10 months after its institutional offering launched, Betterment was able to surpass Wealthfront. That has been a major contributing factor to its growth,” he says. The company has also launched consumer features like RetireGuide, which integrates non-Betterment accounts to provide better retirement savings advice.
What we’ll see next, McDermott predicts, is robo-advisors that offer a one-stop shop for client financial needs, complete with banking and loan products.
5. The market may throw a curveball
Finally, there’s the unknown: the market itself. If 2016 is a down year for stocks as predicted, it will be a big test for these advisors. Apart from that, market turbulence could disrupt the industry’s ability to innovate.
“It will negatively impact some of these incumbent firms in launching their own robo services. It might negatively impact the ability for existing mainstays to be drivers of innovation,” McDermott says. “But then there is the nebulous unknown of who hasn’t launched something, an innovative person who sees an opportunity.”
After all, robo-advisors were born of the last recession.
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Image via iStock.