Will the Fiduciary Rule be a Lifeline for Robos?
Witnessing the immediate success of digital offerings from industry giants Vanguard and Schwab in the past year, many observers had concluded that the independent robo model would be extinguished.
But the pending Department of Labor fiduciary rule has spurred a reassessment among some, suggesting that even smaller platforms still have a chance to survive and reach sustainability.
"This could be a second wind for those robo advisors," says Morningstar equity analyst Michael Wong. "We estimate that $250 billion to $600 billion of low-account-balance IRA assets from clients will be let go by the full-service wealth management firms. If robos can capture even a fraction of that, they could accelerate by several years to the mark where they will be profitable."
In 2015, Wong authored a report estimating that robo advisors needed $16 billion to $40 billion of client assets to become profitable.
A wide gap in client assets has since formed: Wealthfront, Betterment and Personal Capital, considered the three top independents, have a current total $7.6 billion reported AUM, while Vanguard's Personal Advisor Services alone had approximately $31 billion in total assets under management.
Wong, however, notes that recent M&A activity and partnerships being struck between fintech startups and larger financial firms indicates real potential for digital advice providers to collect small accounts deemed not cost efficient to keep or a liability due to the new rule.
"Even Goldman Sachs seems to be prospecting in the robo advisor landscape," Wong says, referencing the bank's recently announced acquisition of digital retirement platform startup Honest Dollar.
Personal Capital, which has faced speculation about its possible sale, has a positive outlook on its prospects in a post-fiduciary rule era.
"In order to act as a fiduciary, you must have a holistic view of a household's financial life and goals, and the only efficient means of getting a holistic view is to collect all of the household's data electronically," says Mark Goines, chief marketing officer at Personal Capital. "The majority of digital advice providers excel in this model and will immediately have an advantage over those who still collect and deliver information the old fashioned way."
Without citing specific deals, Goines says the hybrid advisor "has strong interest from employers and advisors in using our platform to help them deliver a robust, holistic view of household financial activity."
Betterment, the leading independent robo advisor, says it has positioned itself for maximum benefit from the fiduciary rule, having launched its 401(k) platform in January.
"The beauty for us, as it stands now, is that we're already compliant," says Betterment spokesman Joe Ziemer. "We built the company with this type of mission in place."
Wealthfront's CEO Adam Nash has said that independent digital advice platforms are competitive, despite the footprint of incumbent offerings.
"Our job is to make sure that the gap in capabilities and value we deliver grows over time,” Nash wrote in a Quora post in February. “Over the coming months and years you’ll see these inevitable dynamics play out.”
For those small account holders, it is hard to argue with the appeal of a low-cost ETF solution offered by robo advisors, says industry consultant Tim Welsh of Nexus Strategy. "There's nothing complicated here. It's easy to get out, it's everything you want to have in a fiduciary type of product."
The question, Welsh says, is whether those clients will want to default to that type of offering. "Research shows investors still prefer human advice," he says. "So this rule may provide some wind to their sails, but it's not a slam dunk."
Firms operating in the digital space argue the DoL fiduciary rule favors firms who are technologically savvy.
"Changes in the regulatory landscape are opportunities for digital-first advisors because they have a deep understanding of what their clients need and how to configure their technical environment in a way that best delivers an experience with new rules and guardrails," says John Wise, CEO of software firm InvestCloud.
"Digital-first firms that own their data and intuitive designs have a significant advantage over firms that are captive to hard coded technology platforms that are often the slowest to innovate."
Technology will offset the cost of compliance to these rules, adds Kate Crowther, director of government relations at Ubiquity Retirement + Savings.
"The benefit to smaller fintech businesses is that we are more nimble and able to respond to changes in the regulatory field to assist our advisor clients. We are invested in savers retiring whole, with their assets intact, and not gouged by exorbitant fees."
In a fiduciary rule era, the technology-infused advice approach will become essential for any advisory firm that wants to be competitive, says Eric Clarke, CEO of Orion Advisor Services.
"They’ll need to have efficient technology systems in place for proposals, reporting, trading and billing, so their time and resources can be spent on growing the business and serving as fiduciaries for their clients," Clarke says. "If they don't use technology to automate processes and drive those internal costs down, it will be difficult to sustain current profitability."