Five things to expect from robo-advisors in 2016
Only about聽聽maintain a budget or have a long-term financial plan, and聽聽of investors rebalanced their portfolios in 2014.聽If given the option to forgo the mundane details of money management, it鈥檚 fair to say most people wouldn鈥檛 think twice.
, which manage customer investments using聽computer algorithms for a low fee, make that not only possible, but in some cases financially prudent.
You鈥檝e probably heard the big names in this group 鈥� the likes of聽听补苍诲听聽鈥� but by some estimates, it鈥檚 a movement聽200 firms large. Though many of those have few聽to no assets under management, the聽industry as a whole has grown substantially over the last year or so, hitting $21 billion in assets in July 2015,聽.
About 15% of those dollars are housed with Betterment, which has聽emerged聽as the current leader of the independent robos. The company had $1 billion in assets under management聽in January 2015; it currently manages $3.2 billion, passing once-front-runner Wealthfront. That growth isn鈥檛 letting up.
鈥淲e want to help tens of millions of people,鈥� says Jon Stein, Betterment CEO. 鈥淭hat thing that you want that manages your money intelligently for you? That鈥檚 the advisor we鈥檙e building, because we want that same thing too.鈥�
Here鈥檚 what to聽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鈥檚 twice the size of all of the competition combined, according to Stein. It鈥檚 easy to chalk that up to its $0 account minimum, and Stein acknowledges聽that some of Betterment鈥檚聽accounts are small. But he says all of the customers counted in that tally are saving into funded accounts, with most putting away a 鈥渃onsiderable amount.鈥�
That minimum 鈥� or rather, the absence of one 鈥� has put the pressure on other advisors, many of which have dropped their own minimums over the last year.聽, which has $1.8 billion in assets under management, recently聽聽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.
聽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鈥檚 CEO, Rich Hagen, told NerdWallet that聽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聽to a 鈥渟urge in demand鈥� from young customers.聽Those customers no doubt wanted to take advantage of Wealthfront鈥檚 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聽鈥� which amounts to more than聽7% annually on a $500 balance 鈥� has been a point of contention between the two advisors, including a public聽听辞蹿听聽on Medium.)
鈥淲ill there be a race to zero? We think some firms will continue to lower minimums in order to try to acquire clients, but it鈥檚 going to depend on the size of the institution and the target client,鈥� predicts Sean McDermott, a Corporate Insight analyst.
2.聽More brokerages will launch robo offerings
The $21 billion industry figure from Corporate Insight doesn鈥檛 include existing brokerage firms that have added a robo arm, such as聽Vanguard鈥檚 Personal Advisor Services and聽. Both of those services combine robo algorithms with human advisors.
Vanguard鈥檚 service alone had $26 billion in assets under management聽at the end of September 2015; $10 billion of that is transferred assets from the company鈥檚 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. 鈥淭he 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,鈥� he says.
Fidelity is currently聽聽a service called Fidelity Go. The company hasn鈥檛 yet released details about fees or an official launch, though it鈥檚 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聽聽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.
鈥淵ou could think about this as kind of a classic innovator鈥檚 dilemma,鈥� says Stein. 鈥淲e鈥檙e 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).鈥�
That means participants will be invested in a globally diversified portfolio of聽, the investments used by Betterment鈥檚 consumer offering and by most robo-advisors. Betterment for Business 401(k) investors don鈥檛 have access to other options common in 401(k)s, like actively managed mutual funds 鈥� including聽聽鈥斅爋r company stock.
鈥淭hose are generally not great things to have in a 401(k),鈥� Stein says. 鈥淏ut that doesn鈥檛 mean it鈥檚 going to be easy for [incumbent] providers to get rid of those features. They鈥檒l iterate on top of the platforms they already have, providing advice. It鈥檚 going to be hard to fundamentally disrupt themselves.鈥�
One advisor,聽, has long catered to 401(k)s聽鈥斅爊ot as a provider but by managing the accounts of individual employees through their existing 401(k) plans. The service charges $1 a month for accounts smaller than $20,000 and $15 for account balances of $20,000 or more.
4. Robos won鈥檛 charge less, but will offer more
Robo-advisors came into the market on the premise of low fees, and there isn鈥檛 a lot of room for聽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鈥檝e already seen over the last year.
In January, Wealthfront launched tax-minimized account transfers, a product that does exactly what its name implies. WiseBanyan, a smaller advisor that manages accounts for free, recently introduced tax-loss harvesting as a paid add-on service (the service is already standard at many robo-advisors). Personal Capital offers a slew of account tracking and financial planning tools on its site, available for free to even those who don鈥檛 invest with the company (and used to track $187 billion in accounts, it says).
For Betterment鈥檚 part, a portion of its success was the launch of its institutional offering, aimed at financial advisors, McDermott says. 鈥淲e certainly think it鈥檚 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,鈥� he says. The company has also launched consumer features like RetireGuide, which integrates non-Betterment accounts to provide better retirement savings advice.
What we鈥檒l 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鈥檚 the unknown: the market itself. If 2016 is a聽, it will be a big test for these advisors. Apart from that, market turbulence could disrupt the industry鈥檚 ability to innovate.
鈥淚t 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,鈥� McDermott says. 鈥淏ut then there is the nebulous unknown of who hasn鈥檛 launched something, an innovative person who sees an opportunity.鈥�
After all, robo-advisors were born of the last recession.
This article first appeared at
