Why Robo Upstarts Won't Win Digital Advice Race

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Automated investment advice has a bright and profitable future, but digital-first firms who manage to survive the decade will have only a small share of it, says industry research firm Tiburon.

The overall online advice market will top $650 billion by 2019, but assets will largely be split between the digital offerings of traditional discount brokerages and DC plan focused firms, Tiburon analysts predict.

One reason for that, says Tiburon Managing Partner Chip Roame, is an expected great extinction among independent, venture capital-backed digital advice providers -- a group he adds has already peaked in terms of players that the market can bear.

"There are 22 [independent] robo advisors this year, and we expect that to be 10 firms by 2019, partly because of consolidation and partly because they will simply run out of venture capital before they can turn the profitability line," Roame says.

Independent firms such as Betterment, Wealthfront and Personal Capital currently control just over $8 billion in assets, and that figure will grow to $80 billion by the end of decade, Roame says.

But that figure will be dwarfed by the $281 billion Roame predicts will be controlled by the digital offerings from discount brokerages and mutual fund providers such as Schwab, Vanguard and TD Ameritrade.

In the retail online advice market, "DC firms and discount brokerages are going to win," Roame says.


Digital platforms serving the DC space, such as Financial Engines, which recently acquired The Mutual Fund store, are well-established and are financially doing well, and that success will continue, Roame says. (Financial Engines currently has $114.5 billion in AUM).

The big institutional firms with digital offerings -- which currently comprises TD Ameritrade, Vanguard and Schwab -- will dominate the B2C market, Roame adds, noting that Fidelity, Scottrade, eTrade and T. Rowe Price may jump in with their own offerings in the near future. 

"They will own 80% to 90% of the market five to ten years out," he says.

But the story for independent robo firms will be different, according to Roame.

The top three independents -- Betterment, Wealthfront and Personal Capital -- have also raised the most, each grabbing over $100 million in private funding. Roame says they'll need to keep spending generously on technology and brand awareness efforts to stay competitive. For other firms not as well-financed, demands of venture capital backers will quickly catch up.

"A lot of the other robos will sell out," Roame says. "Some are already running out of capital now, and may be for sale quickly."

From the group of independent robo firms in the market, "three or five will survive," Roame says, but notes that given the prices traditional firms have paid to add digital platforms to their offerings -- Northwestern Mutual paid a reported $250 million to acquire LearnVest -- "even if they do not make it as a standalone, selling out is not the end of the world."


Roame had some advice for human advisors who might digest the study's predictions too enthusiastically.

Tiburon's research predicts that the number of clients utilizing robos will grow threefold by 2019, encompassing 3 million consumer households.

Roame says the percentage of advisors who believe that robos will have no impact on their profession (over 30% according to a survey by the firm) are being "naïve."

The popularity of robos will definitely affect the pricing of advice, he says.

"Some financial advisors have their heads in the sand," Roame adds. "Any successful, institutionally-mided financial firm will have a robo offering. … Technology-driven advice will be table stakes."

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