Robo-advisers: Terminator or Transformer?
In recent times, Robo-advisers are in the limelight. Robo-advisers are in no way related to the Terminator or the Transformers movie series. You never know though - looking at the sudden interest in robo-advisers, it may turn out to be a blockbuster. Now, who are these robo-advisers?
Robo-advisers are a class of financial advisers that provides automated (algorithm-centered) investment services. As part of their offerings, robo-advisers can handpick investment portfolios (allocate), rebalance portfolios (automated rebalancing), and offer tax-loss harvesting. Robo-advisers offer personalized portfolio services through top-quality digital (online and mobile) channels, at a reduced cost.
The likes of Wealthfront, Betterment, and other robo-advisers have been successful in attracting funding from Private Equity firms, Venture Capital funds, and strategic investment arms of banks. For instance, in the beginning of 2015, Betterment was able to raise $60M in a new round of funding, while Wealthfront raised $64M in the last quarter of 2014. This funding is in addition to what they have already been able to raise. Robo-advisers have not only attracted funding, but also the attention of battle-hardened financial service industry players to robo-advising. These traditional players have taken different routes (like partnership, own service, acquisition, etc.) to enter the enticing robo-advising space. For instance, Charles Schwab formally launched its own robo-advising service - the Schwab Intelligent Portfolios in the first quarter of 2015. Fidelity partnered with Betterment to create a tool for Fidelity's registered investment adviser clients, while Blackrock has acquired FutureAdvisor, a robo-adviser. Also, in recent times, big players like Merrill Edge and Wells Fargo have also announced their plans to join the robo-adviser race. This is just the beginning of a new trend of traditional players exploring the robo-advisers space more closely.
These new launches and announcements are clearly pointing towards a trend that robo-adviser is here to stay and they are entering main-stream. For now, the robo-adviser cannot definitely replace the traditional financial advisers, but traditional firms cannot completely ignore the robo-advisers' easy to use, low-cost, digital advisory services. They are a compelling selling proposition to the new age millennial and mass-affluent population. For the traditional financial advisory industry, robo-advising can certainly be a value-added service offering to target a niche audience.
It's too early to predict whether Robo-advisers will be the Terminators of the traditional financial advisors or the Transformers, who provided the necessary boost to the industry. Only time will tell. I am watching this space with keen interest. How about you?