Traditional mutual fund ETF providers don't have to worry about the robo trend making them obsolete.
In fact, there are a number of steps these firms can perform to take advantage of a surge in automated investing, industry observers say,
These robo advisors in many ways (to a product provider) are like any other advisor, says Noah Hamman, CEO of D.C.-based ETF provider AdvisorShares. The product providers will want to establish a relationship with these new robo advisors and do what they can to ensure their products are in the universe of consideration for the models and investment strategies being offered by the robo advisors.
Among traditional firms, Fidelity embraced the robo trend by tying up with automated investing service Betterment. Schwab launched its own automated investment advisor service. Vanguard is quietly growing its digital financial advisory unit into a multi-billion juggernaut, and is lowering the minimums to work with their advisors. Merrill Edge is doubling the headcount of their advisors to pursue the robo advisor marketplace.
According to Aite Group, digital wealth management client assets are expected to grow from approximately $16 billion at the end of 2014 to a range of $55 billion to $60 billion by the end of this year. That compares to total advisor intermediated assets of $19.1 trillion, according to Cerulli.
'NOTHING TO FEAR'
According to Hamman, traditional distributors and wholesalers have nothing to fear as robo advisors multiply.
These robo advisors will likely target younger investors with, on average, smaller amounts of assets to invest," he says. "I think higher net worth clients will still be managed by traditional advisors, although, you might see those advisors using a robo service for strategy allocation, but that will still support much of the distribution process that products sponsors use today.
Fund providers must understand how to market, operate and use technology successfully, says Matthew Fronczke, director of product consulting at kasina. Fund sponsors must approach robos like that of a home office at a traditional broker/dealer intermediary, he says, ensuring the marketing and sales approach is tuned to how the product will enhance robo advisor model portfolios.
Operationally, there is no immediate need for fund sponsors to change, as their national accounts staff should be well positioned to cover robo advisors with the support and service they require, he adds.
From a technology perspective, Fronczke says if fund sponsors see the opportunity to offer direct online and automated services they will need to consider if the opportunity is large enough to merit the investment and personnel required to build out the service.
I think the take away is that product providers need to be ready to embrace change, Hamman says in agreement. This is change in all areas, technology, transparency, fees for services provided, and others. It might mean breaking some old process and procedures.
For Vanguard and Schwab to announce their pursuit of the robo advisor service -- its a pretty big development and shows the direction of the industry, Fronczke says.
Still, many fund providers are suffering from the fear of missing out, he adds, noting the opportunity cost among providers if they dont cater their operations, marketing and technology strategies to the robo market is that they may lose market share.
For providers, adding technology to enhance communication with advisors will therefore be critical. In a few years every airline will offer e-tickets, and the ones that dont wont be seen as traditional -- they will be seen as dinosaurs, Fronczke says.
Operationally, fund providers are examining the infrastructure and economics to compete in the market. Providers need to be sure that theyre willing to take on a new fiduciary standard and they have to make sure they have the technology, personnel and expertise to build out models, Froncze says, noting that providers can build organically or go down the route of Fidelity and partner with or purchase a robo advisor.
ETF providers have most to gain from forging relationships with robo advisors, both analysts say.
Most of these [robos] are brokerage-based and target low cost best indexes for their investment strategy models, Hamman notes. He adds that niche ETF providers with superior performance will have more luck with the robo advisor marketplace because low-cost indexes will typically be the norm for this advisor group.
Heres what industry experts suggest that providers should do to better leverage the robo advisor market in how they market, operate and distribute products.
- Research. Study the philosophy behind the robo advisor trend and specific robo-advisors. For example, Wealthfront emphasizes low cost investing in market cap weighted ETFs with a layer of tax loss harvesting. Providers whose products fit into this model could be a fit for the platform.
- Engage with the platform. See how the products fit into the portfolio construction approach and workflow of the platform. Ideally the products should fit seamlessly into the way users navigate the platform to construct or monitor their portfolios.
- Assess technology. From the technology side, firms need to examine if they have resources and expertise to build the technology out to support new platforms.
- Discuss business terms. Explore if there are opportunities for making the product more available, offering incentives for users of the platform. Outside of the robo advisor space, there has been collaborations between product providers like BlackRocks iShares and Fidelitys brokerage platforms.
- Integration. Pursue integration so that timely and accurate data for the products is available on the platform.
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