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Robos and Human FAs Will Wage War Over Mass Affluent

September 29, 2016

The stage is set for the next battle between traditional wealth managers and robo-advice upstarts, Politico writes. The prize: affluent clients that robos haven’t yet lured to their low-cost ways and the mass affluent whom traditional advisors can’t afford to serve, according to the publication.

Robo-advisors have grown tremendously over the past decade, both in their own numbers — dozens have been launched already — and in the number of clients they’ve attracted, Politico writes. SigFig, Acorns, Betterment, StashInvest and Exchange Commission have all cracked the top 50 ranks when measured by the number of clients, according to Investment Adviser Association data cited by Politico.

Nonetheless, when measured by the size of their clients’ assets, none of these firms make the IAA’s top-50 list. Of the $67 trillion in client assets managed by the financial advice industry, only about $2 trillion is with robo-advisors and the automated advice platforms of traditional wealth managers, according to Goldman Sachs data cited by the publication. Just as that data suggests, traditional practices have already pushed back, launching their own robos or buying existing ones at such a pace that some analysts question the viability of standalone automated advice firms surviving without partnering with their traditional rivals, Politico writes.

What’s more, traditional wealth managers are now turning to regulators to curb the competition from upstarts, with BlackRock issuing a report this month recommending stricter regulation, as reported previously.

But regulators have already signaled that they intend to scrutinize robo-advisors, with the SEC announcing in April that it wants to know how robo-advice firms collect customer information, as reported previously. And this summer, William Galvin, Massachusetts’ top securities regulator, issued guidance to firms employing automated advice platforms to increase disclosure of how the robos are used and the fees associated with them, as reported previously. This compliance burden could push up costs for robo-advice firms, Politico writes.

But while robo-advisors haven’t launched a grab for wealthy clients whose complex financial needs normally require hands-on planning, that niche isn’t exactly safe with traditional players, according to the publication. For now, the bulk of robo-advice assets are held in small accounts primarily owned by people under 35, Politico writes. But those Millennials are exactly the clients established firms need to attract as their bread-and-butter wealthy customers transition to retirement, according to Politico.

Meanwhile, robo-advisors are also getting into aspects of financial planning once reserved for the wealthiest clients, such as tax loss harvesting, the publication writes. The likely outcome, however, is a “cyborg” model that includes technology solutions, already used to some degree by many traditional firms, as well as a human touch, as reported previously.

Meanwhile, robo-advisors still need to stand the test of a major market upheaval, Politico writes. And it’s far from certain how a serious disruption affects the portfolios handled by algorithms without human involvement, according to the publication.


But the various proprietary models employed by robos aren’t yet well understood, one RIA consultant writes on Seeking Alpha. After all, Betterment and Wealthfront, the two pioneers in the sector, offer comparable models to investing yet produce very different allocations, Tony Ash writes on Seeking Alpha. Both claim to use the core efficient frontier approach stemming from the work of Nobel Prize-winning economist Harry Markowitz that strives for efficient portfolios by analyzing risk, return and correlations among asset classes, Ash writes. Yet Wealthfront invests 10% more in equities and has less exposure to international bonds (9%), compared to 20% for Betterment, says Ash. Wealthfront also uses seven asset classes, compared to Betterment’s 11 — although both use plenty of Vanguard’s ETFs.

By Alex Padalka
  • To read the SeekingAlpha article cited in this story, click here.
  • To read the Politico article cited in this story, click here.