By partnering with automated investing service Betterment, Fidelity embraced the robo advisor trend that is impacting how many mutual fund and ETF fund providers market and distribute their products. 

Many providers were not surprised by Fidelity's move, viewing it as an opportunity for new marketing and distribution strategies. But a question still lingers: Will the robo trend change the type of products being offered and put traditional wholesalers and distributors at risk?

Industry experts note that the robo trend is only intensifying with Fidelity’s new partnership. It follows a recent move by Charles Schwab, which announced that it would launch a no-fee automated investment advisor service. Meanwhile, Vanguard is lowering the minimums to work with their advisors and Merrill Edge is doubling the headcount of their advisors to pursue the robo advisor marketplace.

According to Aite Group, as of September, assets managed by digital advisors were $4.3 billion in assets under management. That compares to total advisor intermediated assets of $19.1 trillion, according to Cerulli.

“These robo advisors in many ways (to a product provider) are like any other advisor,” says Noah Hamman of 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.”


According to Hamman, traditional distributors and wholesalers have nothing to fear as robo advisors increase in number. “My best guess right now is that these robo advisors will likely target younger investors with, on average, smaller amounts of assets to invest.  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.”

The takeaway for fund providers to market, operate and use technology successfully: Fund sponsors must approach robo advisors like that of a home office at a traditional broker/dealer intermediary, ensuring the marketing and sales approach is tuned to how the product will enhance robo advisor model portfolios, according to Matthew Fronczke, director of product consulting at kasina.

He says that 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. From a technology perspective, if fund sponsors see 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 adds. “This is change in all areas, technology, transparency, fees for services provided, and others.  It might mean breaking some old process and procedures.”


The robo advisor market represents a new opportunity for particularly ETF providers -- those like Vanguard that are focused on maintaining low expense ratios, says Aniket Ullal, founder of First Bridge Data. The announcement that Schwab will also be launching a robo advisor service is a validation of the model, he says.

Others agree that ETF providers have most to gain from forging relationships with robo advisors. “Most of these robo advisor systems are brokerage based and target low cost best indexes for their investment strategy models,” Hamman notes. He adds that more niche, specialized 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.


“For Vanguard and Schwab to announce their pursuit of the robo advisor service – it’s a pretty big development and shows the direction of the industry,” Fronczke says.  Many fund providers, he says, are suffering from a fear of missing out mentality. The opportunity cost among providers if they don’t cater their operations, marketing and technology strategies to the robo advisor market is that they may lose market share, according to Fronczke.

For providers, adding technology to enhance communication with advisorswill therefore be critical. “I can image in a few years every airline will offer e-tickets, and the ones that don’t won’t be seen as ‘traditional’ -- they will be seen as ‘dinosaurs,” Fronczke says.  

“So operationally fund providers are examining the infrastructure and economics to compete in the market. Providers need to be sure that they’re 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,” Fronczke adds, noting that providers can build organically or go down the route of Fidelity and partner with or purchase a robo advisor. 


Here’s what industry experts like Fronczke and others say 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, do you 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 BlackRock’s iShares and Fidelity’s brokerage platforms.

Integration: Pursue integration so that timely and accurate data for the products is available on the platform.  

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