A Charles Schwab entry into the digital advisory space could shake up the existing players -- but also ramp up the company's rivalry with the traditional advisors who use its custodial services, say industry analysts.

"Although it may seem like bad news for startups in the online advisory market, I think an entry by Schwab may be more of a threat to established advisors, by putting even more downward pressure on fees," says Grant Easterbrook, an analyst for Corporate Insight's Consulting Services in New York.

That's particularly true for advisors seeking younger clients, says Sophie Schmitt, an analyst for Boston-based Aite Group. "Schwab already has online accounts and customers who only talk to advisors by phone," Schmitt says. "They need to appeal to a younger generation in a more effective way, and will probably compete on lower cost and lower minimums."

Schwab chief executive Walt Bettinger told Wall Street analysts last week that the company was "fast at work on what we believe will be a groundbreaking and market-impacting introduction of an online advisory solution." He offered no further elaboration.


The Schwab move would bring the muscle of the financial services establishment into an arena currently dominated by startups.

Many of the new online advisory firms charge clients fees as low as 15 basis points to aggregate account and manage their assets, using sophisticated algorithms to execute buy and sell orders.

And Schwab isn't the only firm eyeing the space. Vanguard, HighTower Advisors, and online brokers Scottrade and TradeKing are all expected to roll out more robust, inexpensive, online advice and investment services.

But traditional RIAs and already-established online firms hardly need to panic, say industry observers and executives.

"It's important to remember that other big financial firms, most notably Bloomberg and LPL, have also tried to enter the digital-only market without success," Easterbrook says. "Right now I'm in the 'I have to see it to believe it' camp."

"Those big companies are not well built to innovate and to execute quickly," argues Chris Nicholson, head of communications and recruiting  for one of the startups: San Francisco-based FutureAdvisor. "They have brand recognition, can spend tons on advertising and probably could undersell us. But they also have huge inefficiencies, and their only disadvantage is themselves."


Indeed, for the moment Future Advisor and other online firms are on an enviable growth path.

FutureAdvisor's assets under management have jumped nearly 70% in two months, according to Nicholson, rising from the $118 million reported on its ADV form in late May to approximately $200 million in late July.

Industry-leader Wealthfront now has $1.2 billion in AUM; Betterment, whose big-name backers include Steve Lockshin, is managing over $700 million in assets.

Over the past three months, assets directly managed by online advisory firms rose more than 40% -- to $3.7 billion in July from $2.6 billion in April -- according to statistics compiled by Easterbrook in a new Corporate Insight study, "Next-Generation Investing: Online Startups and the Future of Financial Advice."

Online firms also now provide paid investment advice covering $12 billion in assets, up 33% from $9 billion in April, according to the study.

The numbers suggest "continuing consumer interest in low-cost investment advice relative to a traditional financial advisor relationship" according to the report.

In addition to low fees, the online advisors' transparency, algorithms and user-friendly websites and mobile apps "should help these innovative firms to continue to attract the next generation of tech-savvy Gen X and Gen Y investors," the report concludes.


The real shift may come when traditional advisors -- who still control most of the clients and assets -- seek a way to work more closely with their online frenemies.

Nearly a third of RIAs and broker-dealer executives polled in an informal Fidelity Institutional survey earlier this year said they plan to look for ways to partner with a digital company.

Betterment has already announced Betterment Institutional, a new private-label platform to help advisors use the company's investment management, trading and technology support to better connect digitally with clients.

Motif Investing received $35 million in funding this spring to help fund an asset allocation platform that advisors can use to improve their digital offerings. And one new digital investment manager startup, UpsideAdvisor.com, aims to work exclusively with advisors.

Other online firms reported to be working on advisor partnerships include Jemstep, Financial Guard and Future Advisor.


"It will be interesting to see how these partnerships develop," says Aite Group's Schmitt, who released a research paper earlier this year on the emerging players in the sector she calls "digital wealth management."

"It seems that online investment managers are more geared to partner with financial planners, who can then delegate the investment process to them, while pure tech firms seem like a more natural partner for money managers."

A number of new firms have emerged this year, the Aite report states -- "betting on the resilience of the traditional advisor-led model and hoping to serve as advisors' digital offices."

Firms including Balance Financial, Blueleaf, Oranj, Wealth Access and eMoney Advisor are targeting independent advisors, small to midsize IBDs and advisors with private banks, the report says.

But larger and more established wealth managers should consider buying, not just partnering with the new online firms, the Aite white paper says.

"Because online advice providers do not compete with a wealth management's firm core investment management service and do provide a cost-effective way to prospect for new clients and/or serve low-asset balance clients," the report says, "they should be interesting acquisition targets for traditional providers."

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