This past year we witnessed the launch of some high-profile digital initiatives, but they could be overshadowed by developments in 2016.

Industry analysts are predicting the next 12 months will bring even more rapid development and change for the digital advice space.

What can top the billions subsumed by Schwab and Vanguard’s digital offerings, the multimillion dollar mergers performed by firms like Envestnet and BlackRock, or the decision by Betterment and other digital startups to muscle into the 401(k) market?

Here's what to watch for in 2016. --Suleman Din

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Read more:
Regulators May Put Robo Firms Under Fiduciary Microscope
Digital Wealth Disruption: The Competition Evolves
Why Digital Upstarts Won't Win Advice Race

A Build or Buy Crescendo

The surprise news late in November that the third-largest independent digital advice platform could be for sale is just the tip of the iceberg, says Corporate Insight's Sean McDermott, who leads fintech research for Corporate Insight. "This is the first of many such announcements," he says, adding that increased competition will tilt the digital strategy of many firms to acquire rather than attempt to build their own. Additionally, to differentiate their digital offerings, McDermott says, the biggest firms will likely eschew white-labeled platform options and opt instead for proprietary technology.





A Mass Robo Extinction, Accelerated

Prominent industry observers all say that some independent robo platforms will close before the end of 2016. Whether it is because incumbents are lumbering into the digital space with their own offerings and devouring market share, or because the cost of retail customer acquisition is too high, even the most financed digital firms face daunting odds. As Morningstar notes, independents will need to reach a client asset profitability threshold of $16 billion to $40 billion; the largest independent, Betterment, currently has just over $3 billion AUM.




A 401(k) Market Heating Up

The direct-to-consumer model for independents has all but dried up. At the same time, the direct-to-institutional play is seeing increased competition from traditional giants such as BlackRock. Where there is plenty of space to maneuver, though, is the $4.4 trillion retirement savings market. Digital firms are poised to reap the benefits of a DoL fiduciary standard that will create an opportunity for scaled-down, low-cost advice fiduciary models. Leading the charge will be Betterment. "For too long, the market has been cluttered with inefficient and expensive offerings," says its CEO Jon Stein. "We're excited to be delivering a smarter product for both sponsors and participants."



An Intensifying Regulatory Spotlight

Of course, the SEC could throw a wrench into the plans of digital advice platforms with intensive inquiries into their business model or by enacting new, stricter fiduciary rules specifically targeting the digital space. “What does a fiduciary duty even look like or mean for a robo advisor?” SEC Commissioner Kara Stein asked an audience at Harvard Law School in November. We could get a better sense of the SEC's line of thinking regarding digital advice providers this upcoming year.



A Space for Banks to Enter

The digital advice market is a natural fit for banks with a wealth advice brand, Corporate Insight's McDermott says. But banks that have not had a footprint in financial advice could also enter the market with a digital offering. Of course, that's if they don’t mind dealing with the additional regulation surrounding financial advice, McDermott notes. "There's certainly an opportunity for banks which are sitting on a pool of thousands of potential clients."



A Diversification in Robo Offerings

Conversely, some robos could add to their offerings or change their composition altogether. Kapital and Aspiration, for instance, will be offering high-yield checking accounts to clients. Schwab is looking to change the basis of their robo platform from low-cost ETFs to mutual funds. And there's the beginning of niche robos, such as Ellevest, a platform that is aimed specifically at women investors which will launch in 2016. Alois Pirker, research director for Aite Group's Wealth Management practice, says if it gains momentum, Ellevest may attract the attention of a larger wealth management firm that has had issues connecting with HNW women. "If your differentiation is solely on price it is going to get harder," Pirker says.



An Expansion of the Robo Concept

The model of taking traditional financial services digital and simplifying them in the process has proven to be a powerful one, says Corporate Insight's McDermott. The model can be replicated to include a variety of financial services and products, he says, which could in turn pave the way for an all-encompassing digital financial services firm. "The robo concept is expanding outwards and being applied other segments," he says. One segment that has seen a recent spurt of activity is insurance. A prime example is Haven Life, a robo insurer owned by Mass Mutual. "I haven’t seen the two services married under one platform," McDermott says. "But certainly robo firms could make that next leap into that space."



A Digital Standard for Everyone

Incumbents are expected to launch a slew of digital initiatives in 2016, spurred by the quick success of offerings from Vanguard and Schwab. The ones to watch include advice platforms from Fidelity and LPL that are currently in pilot stages of development. Other large traditional wealth management firms, such as RBC and Wells Fargo, are in the final decision process about their digital strategy and could come out with announcements later in the new year. However, some large asset managers are still holdouts: Prudential and Invesco Powershares, for instance, have kept mum about digital plans.



A Clearer Sense of the Digital Market

How big will the digital advice market become? The answer really depends on which white paper you read. Industry research firms have done studies and each one has presented its own growth predictions. The studies have disagreed over numbers and even definitions of what constitutes robo advice. What is uniform among all analyst predictions is that the digital advice space, though it represents just a sliver of the total invested assets in the U.S., will grow exponentially in a short period of time. But the industry may push next year for more uniform definitions of digital advice and clearer reporting of digital assets, especially if providers come under closer regulatory scrutiny.