Editor’s note: Shane Leonard, CFA, is the CEO and co-founder of Stockflare, a financial data company. Previously he worked as a stockbroker at Citigroup and Credit Suisse.
If 2014 was the year that robo advisors came of age, then we’ll probably look back at 2015 as the year the traditional asset management industry fought back. Is this move going to be the death of Wealthfront, Personal Capital, Betterment and the rest of the robos? Will the new entrants with their mix of low fees, great online tools and portfolios of ETFs that automatically rebalance be able to survive?
How big are their war chests?
Each quarter of 2014 saw the new entrants raise increasingly larger sums of money. To date, Wealthfront has raised $130 million, Motif Investing $126 million, Personal Capital $104 million, Betterment $45 million and FutureAdvisor $22 million. Wow, you might think. But are these war chests going to dent the big players? No.
Let’s put their war chests in perspective. The asset management industry generates $215 billion in sales every year. Charles Schwab, a giant in the retail space, spends $300 million a year on marketing, just 5 percent of its net revenue. BlackRock, a global giant, spends $400 million a year or 4 percent of its net revenues. Both companies have healthy growth and high margins.
How are the traditional players reacting?
Like any large organisation with high margins and good growth, the traditional asset managers have not been fast to act. It’s been a bull market since mid-2009, so there has been little pressure for them to act. Business has been great.
But Wealthfront has now passed the $1.5 billion assets under management milestone. They point out that it took them just two-and-half years to get to $1 billion of assets. But it took Schwab six years. $1.5 billion may be chump change compared to the $2 trillion that Schwab manages today, but the threat has been noted.
In October 2014, Schwab announced Schwab Intelligent Portfolios. The cost is 0.00 percent and it goes live this quarter. In December 2014, Vanguard, the pioneer of ETFs and index investing, announced an online advisory tool. The cost will be 0.30 percent. We are even seeing startups, like Upside, with a focus on helping the traditional asset managers and the investment advisors fight back.
The race to zero
Robo advisors have now entered the race to zero. No one should be surprised. Any technology that can be replicated will always be replicated by someone else doing it cheaper. The blossoming of new robo advisors backed by angels and venture capitalists in the second half of 2014 shows how little differentiated the new entrant asset managers are.
The trend is spreading to other markets with robo advisors arriving in Europe and Asia. Few of them have got any scale, nor are they profitable. Worse, they’ve not lived through a crash. Now they have to deal with Schwab cutting to the final act, a zero fee.
Like any new industry there will be a shake-out. Probably driven by the next bear market. But in the meantime, venture capitalists will continue to pour money into the robos and let them spend hundreds of dollars acquiring each new client. Worse, the robos are now competing with each other, ferociously, not just with Schwab, Vanguard and the traditional asset managers.
Those that survive the shake-out may have to carve out a niche for themselves and build a moat around it, as Warren Buffett would say. Examples may include Wealthfront’s tax-loss harvesting products and their Single-Stock-Diversification plans, helping Twitter and Facebook employees “balance” their portfolios away from the stock options.
But let’s not kid ourselves, the traditional asset management industry has too much at stake to not attack the robo advisors. They’ve poked the bear. Now for the reaction.