What Fund Directors Need to Know about Robo Advisors

Jay KeeshanMutual FundsLeave a Comment

Robo Advisors (Robos) is a method of customized internet based financial advice. They can be simple, essentially an extension of the “model portfolios” financial planners have used for years to help tailor advice to investors to accommodate age, risk tolerance and objectives. Robos can also be complex, actually executing an asset allocation strategy for a client who has no or limited interaction with a financial planner.

“A simple Robo costs the sponsor about $3 to $5 million to develop”

A simple Robo costs the sponsor about $3 to $5 million to develop, whereas a complex Robo can cost a hundred million or so because it may be integrated into the existing customer relationship management (CRM) system and even tied to a trade execution system.

A Robo is a method for mass customized of financial advice using algorithms. As such, a Robo provides an entry point product for the mass market (usually defined as having more than $100,000 but less than $500,000 in investable assets), who are too expensive to service on an individualized basis. The investors, often in the “mass affluent” and/or “self-directed” segments find the typical personal service charge of 100 basis points or more objectionable. Millennials, who are likely to be “early adopters of new technology” are often cited as a primary target for Robos, in contrast to the wealthier senior citizen segment.

An advantage for the sponsor is Robos facilitate remote servicing of clients from a central hub, where suitability and compliance requirements can more effectively be met than in a far flung filed sales force. Not surprisingly, the legal and regulatory framework for Robos is only just now being developed. As a result, Robos today are much closer to the well-established “model portfolios/asset allocation” model which has a clearer market and regulatory environment.

The asset class most offered through Robos are mutual funds and sometimes ETFs. Like the model portfolios which preceded Robos, the most frequent allocation offered by Robos appear to be the Equity/Fixed Income/Cash mix. Our research has not revealed any separate accounts or individual stocks and bonds.


The Robo market today divides into two parts: legacy and emerging. Legacy participants are the well-established banks, brokerages, and fund companies which have an existing business which they are anxious to hold on to by servicing in a more cost efficient manner. The principal legacy providers are Fidelity, Vanguard, Schwab, Scott Trade, E-Trade, LPL and Merrill Lynch. Even Morgan Stanley has indicated its intention to develop a Robo. On the other hand, Raymond James indicates that it will not for fear of cannibalizing its field force and depressing the price and value of personal advice.

The emerging segment consist of new market participants, who believe technology and clever market positioning can allow them to gain share form the legacy players. The best known emerging Robo providers are Betterment about $3 billion, Wealthfront about $3 billion, Motley Fool Wealth Builder, Future Advisor and LearnVest (which was recently bought by North Western Mutual).

Robos are quickly being developed by large international players so as to more economically service the vast international market of mass affluent investors. Santander, ABN/ AMRO and the large Japanese banks are early players.

The Robo market in the United States is estimated to have about $40 billion in assets under management. Of this, Vanguard probably has about $20 billion as it converts many of its mass affluent customers to a Robo platform. Fidelity and Schwab are estimated to have $10 billion between them. Among the emerging players, Betterment and Wealthfront are estimated to have about $3 billion each.

Not surprisingly, financial pundits are inclined to believe that the top emerging Robo players, like Betterment and Wealthfront, are candidates to be acquired by the legacy players who have not yet developed their own Robo platform.


The legacy Robo providers seem to cluster around 30 bp when their product is offered as a standalone service. Vanguard Personal Advice Service is priced at 30 bps when offered to existing mass affluent customers, many of whom fall into their existing Flagship Account category. Vanguard’s strategy seems to be to convert their customers who are currently self-directed into the PAS product. 30 bps also seems like the preferred price for Schwab’s Customized Portfolio Robo offering.

At the other end of the spectrum is Huygens Capital Personal Robo offering which is priced around 125 bps. Their Robo appears to come with a real person available for supplementary and clarifying discussion.


As with any new technology, the first challenge market acceptance by investors who either turned off by the current price of financial advice or who need the personal interaction of a specialized financial planner. Early market research shows that customer satisfaction can be enhanced by the use of Robos.

Another challenge is that established financial planners fight the introduction of a product which may replace them. This could be done by refusing to carry or push product from sponsors who introduce Robos. The fear of cannibalization is very real to a mutual fund company which is seeking to supplement its current distribution. Another form of fighting back against Robos is to claim that they need to register with the SEC as investment advisers.

A challenge for the regulators is that Robos are unlikely to be reassuring for investors when the markets turn sour. A proven benefit of the existing system of personal advice is that a nervous investor can be persuaded to buy and hold rather than cutting losses by selling into a declining market.

An operational challenge for Robos is how best to handle rebalancing a portfolio. This is tricky because rebalancing involves making some judgment about market timing. Historically switching out of one asset class into another, or even more complicated among various classes of bonds, is best left to investment professionals.

In sum, Robos offer a wonderful new distribution platform, but integrating them with the established channels is extremely challenging.

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