Online advice startups like Personal Capital, SigFig and Wealthfront have generated a lot of buzz in the past few years and their low-cost offerings and innovative technology have caught the financial services industry’s attention. Whenever we discuss these firms, one question inevitably arises – how much money do theyactually advise?
To answer that question, we collected up-to-date assets under management (AUM) and advised assets figures from 11 leading startups – AssetBuilder, Betterment,Covestor, Financial Guard, FutureAdvisor, Jemstep, MarketRiders, Personal Capital,RebalanceIRA, SigFig and Wealthfront. As of April 1st, 2014, that figure was $11,527,311,000 – an impressive number given that most of these firms launched within just the past two years. Of that, $2.6 billion is under discretionary management, which means the startup trades on behalf of the client. The remainder – just under $9 billion – falls into the category of paid investment advice delivered online without discretionary control.
Those 11 firms provide a range of services, from algorithm-based analysis that tells clients what to buy and sell to human financial advisors that never meet clients face-to-face and serve them via phone, email, and video chat. We chose to highlight these startups as they are the best known and relatively established in this category. Looking at just the direct B2C investment advice space (a fraction of the 200+ fintech startups we track), we’ve identified 28 other up-and-coming companies that have yet to launch or have gone live very recently. Clearly, the online advice business is booming.
Will human financial advisors lose their jobs to software?
Regardless of what the startup world is doing, traditional wealth management firms like Merrill Lynch, Morgan Stanley and UBS face two major challenges – the changing face of its customers and pricing pressures.
Baby Boomers have begun to retire en masse, which means wealth management firms must gradually shift their focus to Gen X and Y if they want to grow. Unfortunately, these younger investors differ from their parents in many ways:
- Younger investors have a more digitally-centered lifestyle, with high expectations for online services. Websites and mobile apps are weaknesses for most wealth management firms.
- Gen X and Y are skeptical of large financial institutions, particularly those associated with the financial crisis. Many of the major wealth management firms fall into that category.
- Younger investors don’t put as much value on regular face-to-face meetings as Boomers do. Such meetings are often positioned as the cornerstone of the traditional financial advisor-client relationship.
- Gen X and Y are cost conscious and put a high value on transparency. Wealth management firms are more expensive and generally do not offer transparent pricing information online.
- Younger investors are more diverse than the current financial advisor population, which skews heavily male and Caucasian.
These generational differences will benefit more nimble online competitors in the long term if the established firms do not innovate.
Beyond demographic challenges, pricing pressure is another competitive threat to traditional advisory firms. New startups are setting a very low price point (0.25%-0.75%) for the annual cost of investment advice compared to the 1%-2% of assets that full-service brokerage firms typically charge to manage a client’s money. It will be hard for tomorrow’s advisors to convince investors to pay this much if they are satisfied with one of these newcomer’s services that charges significantly less.
Not all of the news is bleak for traditional wealth management firms. Services like estate planning and financial planning for high net worth individuals remain hard to automate. Most affluent Americans have neither the time nor the confidence to use a do-it-yourself online service for such complex financial matters. That said, traditional advisory firms must still modernize their digital experience, increase transparency and diversity, and use new technology to improve efficiency and pass on some of the cost savings in the form of more competitive fees if they want to succeed with younger investors.
Established wealth management firms must innovate or else
Inevitably, some of the new fintech startups we track will fail, and the established giants still have enormous advantages. But the incumbents are faced with a classic business dilemma – their current model will continue to work in the short-term, but substantial changes and investment are necessary for continued long-term success. If the major firms don’t rethink their approach to doing business, they will probably lose significant market share to competitors that are better attuned to what Gen X and Y investors want.