Robo Advisors: Digital Disruption In Asset And Wealth Management by Capgemini Consulting
Robo Advisors are starting to win market shares at the expenses of traditional players thanks to an attractive value and a lower cost offer
Robo Advisors are winning ground in the portfolio management industry. They are currently under the limelight. Venture Capitalists, as well as some Asset Managers, are heavily investing in some of those start-ups to the extent that people are talking about a Robo Advisors bubble, and financial institutions are monitoring them very closely, sometimes with amazement, wondering whether they represent a threat or an opportunity.
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The ‘pace of growth’ of Robo-Advisors assets under management is impressive. Pioneers like Betterment and WealthFront launched respectively on 2010 and 2011, already manage around 2.5bn dollars of assets each. The global US market concerns between 14 bn and 16 bn dollars of AUM as of end of 2014. Market specialists anticipate this rise to continue and even to amplify over the next years. However there is no clear consensus on the level of this increase. From our point of view, and considering a small slowdown in the momentum this year, we estimate that AuM should target between 1 to 2 Trillion dollars in a time horizon of 5 years.
Even though those automated investing services are more established in the US, Robo Advisors are only entering the French market: both discretionary portfolio management and advisory Fintechs have been launched in the past 2 years.
1. Robo Advisors: From production to direct distribution
The traditional investment value chain, from the creation and management of funds to their distribution and associated services (i.e, reporting), is being reshuffl ed by the Robo-Advisors’ approach which therefore are impinging on most of the blocks of this value chain, and threatening Asset Managers, as well as insurers or retail and private bankers.
Traditionally, the value chain is divided up between several stakeholders:
- Asset Managers & Insurance: creating funds, managing portfolio in order to obtain the best performance and partnering with distributors in order to reach an enlarged number of clients
- Private, Retail bank and IFA: ensuring the distribution of funds to retail clients by providing them the best advice on their project vis-a-vis their risk appetite
Everyone talks about how Robo Advisors can’t connect with clients. I actually believe those kinds of tools are like an ATM machine. We are all going to have it. – Larry Fink, Blackrock, August 2015.
Robo Advisors are new players in this value chain. They provide automated, algorithm-based portfolio management advice without human financial planners or advisors, and with a best in class customer experience. By offering services going from investment facilitation to portfolio management, they allow distribution of funds directly to retail clients together with automatic advices. As a consequence, they are mainly in competition with funds distributors (private, retail banking & CGPI). Nevertheless, to quickly gain market share, Robo-Advisors are required to set up partnerships with banks/brokers. Indeed, they could not be as competitive in the market on a stand-alone basis.
The robo-advice tool, which is an assest-allocation tool, is kind of talking common sense and putting it into a very user-friendly model. If places like us don’t have that capability, we should have that capability, whether we built or buy, we should have it. – James Gorman, Morgan Stanley CEO, November 2015.
2. The value added of Robo Advisors relies mainly on a low cost offer and an enhanced client experience
a) Robo Advisors have an aggressive position on pricing
Robo Advisors management fees are low, and that is one of their main attractive points. In fact, for Top 10 Robo-Advisors on the US market (the most advanced one), annual management fees are less than 89 bp1, depending on the company and the size of the account.
This is due to the fact that they mostly propose to invest on low cost index funds and exchange traded funds (ETF). Indeed ETFs are cheaper than traditional mutual funds for 2 main reasons:
- Tracking an index is inherently less expensive than active management
- Process in Buy /Sell requires less work (done instantaneously while mutual funds require a heavy process)
Most of Robo Advisors even offer a declining fees structure to their clients. For instance, one of the Top 10 US Robo Advisors offer is rather straightforward and regressive according to the invested amount:
Some Robo Advisors do not request any minimum invested amount (such as Betterment) but other do so and first deposit amount range from a small ticket, $500 for Wealthfront, to a much larger one, $500.000 for Vanguard Personal Advisor Services.
Regarding the French market, the launch of Robo Advisors is still recent and they are not mature enough in order to draw any conclusions on the pricing strategies. Some start-ups are still waiting for their regulatory approval and do not want to communicate about their pricing policy. However, concerning the “early birds”, we can observe that Yomoni which obtained the fi rst AMF agreement as a management company in August 2015 and Advize (AMF agreement as CIF and ACPR agreement as insurance intermediary) are to apply higher annual fees than their US counterparts. Minimum invested amount is very low with € 1000 for both players. On the other hand, Fundshop and Marie Quantier have chosen alternative business models, as they charge a monthly service fee not depending on the assets under management.
In addition to management fees, most Robo Advisors display ETF (Exchange Traded Funds) fees, when those fi nancial instruments are part of the investors’ portfolios proposal. Those fees are rather low (usually 5 to 40 bp).
Usually, no trading, custodian or exit fees is charged, which is the case for Wealthfront, Betterment, Personal Capital or Vanguard. This is a major strategic positioning for Robo Advisors that therefore do communicate actively on this competitive advantage in comparison with traditional players whose withdrawal, custodian and transaction fees represent a significant part of their revenues.
Nevertheless, additional fees may however be charged by some Robo Advisors:
- Operating costs
- Custodian fees
- Trading fees
- Brokerage fees
- Performance fees
b) A revolution in customer experience?
On the top of competitive prices, Robo Advisors are building on their direct interface with clients and have developed cutting-edge technology platforms offering for some of them a unique client experience, mostly inspired by what the digital revolution is offering to its clients in retail banking.
Betterment is one of the most advanced platform in this regard, “the Apple of finance” has developed a very sleek and minimalist platform using a plain and straightforward language, a compelling call to action through multiple and visible buttons which trigger surfers to start investments, inspired by the innovative disruption the technology firms have brought in interface devices during the last decade. These apps are often connected to other social platform providing blogs or resource centers, with integrated sophisticated technologies and functionalities, such as best-in-class and interactive reporting tools, online chat, etc.
Real time data and simulation displays are also a new interesting development provided by those platforms. For instance, once the risk and reward profile questionnaire is answered, Wealthfront displays, on a real-time basis, an asset allocation proposal based on the risk tolerance of the investor and on the purpose of the investment (taxable or retirement investment). Those parameters can then be monitored by the investor on a real-time basis.
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