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Digital advisors thrive, defying industry pessimism

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It wasn’t too long ago that the diagnosis for most independent hybrids and robo advisors was terminal. But thanks to consistent client asset infusions, a number are managing to thrive.

Personal Capital is the latest digital-first wealth manager to topple the $10 billion assets under management milestone — joining Betterment and Wealthfront as the third online independent to amass assets above the marker. The Redwood, California-based firm offers free planning software on the internet, with the goal to upgrade prospective clients that have more than $100,000 in investable assets to premium products. Assets ballooned 60% since the fourth quarter of 2018, taking in $2 billion, according to the company.

While the results are impressive, assets in the digital independent channel still pale in comparison to those managed by the largest incumbents. Vanguard’s Personal Advisor Services claims the lionshare with upwards of $105 billion, although competing incumbent offerings, like Schwab’s Intelligent Portfolios, may soon take the top position. Discount brokerages are expected to be the dominant force in robo advisory by 2023, cornering almost half of all digital assets, according to a recent report by Aite Group.

“It is a nice milestone for Personal Capital,” says, Joel Bruckenstein, founder of the technology conference T3. However, the business model might be susceptible to newcomers, he warns. “I don’t see a lot of proprietary [tech] there that can’t be replicated.”

The fate of some upstarts is still reason for caution among independent shops. All four robo closures in recent months were startups, according to the Aite research. Due to valuation considerations and the fact that almost all the major incumbents already offer digital financial advice, the road to continued growth for many independent robos may get rockier, experts say.

“It’s clear that the hybrid model really rules the day, with Fidelity and Vanguard in the lead,” says William Trout, senior analyst with Celent. “But Schwab’s success in the direct-to-consumer space and the (admittedly more limited) traction achieved by Personal Capital do speak to the viability of the ‘advisorless but managed’ model.”

The robo advisory space may become large enough to support dozens of competitors with differing business models if analysts are right about its future growth. Nearly 60% of Americans expect to use a robo advisor by 2025, according to research by Charles Schwab. Forty-five percent of Americans think the technology will have the greatest impact on financial services — more than cryptocurrency, blockchain and AI.

In total, assets managed on digital platforms are expected to soar to $1.26 trillion by 2023, according to Aite Group. And as the automated investment channel becomes more crowded and commoditized, robo advisors are getting creative with new offerings.

A number have brought added products in to move the industry’s viability focus beyond total AUM, intended to help cross-sell products to existing customers and keep more client wallet share on their platforms.

Carson Wealth teamed up with a digital banking provider to offer checking accounts with direct deposit options and access to tens of thousands of ATMs. Wealthfront has seen considerable traction in its new savings account that has some of the most competitive annual percentage yields in the industry. The new saving accounts has reportedly brought in as much as $1 billion in assets since its launch in February.

In Personal Capital’s case, the firm landed $50 million in new funding in February and promptly expanded its marketing department and opened up offices in other geographic locations. The digital-first hybrid now has roots in San Francisco, Denver, Dallas and Atlanta. “Personal Capital in particular has built a war chest in terms of funding and investor credibility that will stand them well in any downturn,” Trout says.

So will the majority of robo advisors eventually close their doors or attract enough funding from investors to eventually become profitable? Only time will tell.

“The [independents] are going to stick around,” says Trout. “Whether to compete or to be bought out is still to be determined.”

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