Fintech

A four-way duel among robo-adviser biz models: Which is best?

Breaking down the big categories of online financial advice including what they offer and how much it costs.

In recent weeks, several of the so-called “robo-advisers” have raised a significant amount of venture capital, attempting to build on their early successes and scale their businesses and disrupt the traditional financial services industry. In fact, with $95M of capital raised in just the past few weeks, the question has even been raised about whether a robo-adviser “bubble” is emerging.

Notwithstanding the amount of money flowing into the robo-adviser “channel,” though, it’s crucial to note that the leading robo-advisers actually run substantively different business models and have very different value propositions. And with each iterating on a different underlying model, a sort of horse race is emerging and the growth (or lack thereof) for each platform in the coming years — along with how each navigates the next inevitable bear market that will eventually come along — may reveal a great deal about what value consumers do and don’t place on different parts of the (robo) adviser value proposition.

Accordingly, the four key robo-adviser models to be aware of are:
• Monitor and Give Suggestions (For Consumers To Implement Themselves). This business model charges what is usually a flat monthly fee (e.g., $15 to $50 a month month depending on account size) to monitor all of an individual’s accounts (through account aggregation tools), and provide periodic recommendations on what to buy and sell, either to swap out poor performers and high-cost funds for better-performing low-cost ones, or to provide re-balancing recommendations. Key players in this category include Jemstep and MarketRiders.

• Online-based Portfolio Manager. This business model charges a percentage of AUM (typically 0.15% to 0.5%) to directly manage assets (which means the funds are actually transferred to the online investment adviser). Services implicitly include investment selection and implementation, and also typically include re-balancing and tax-loss harvesting. Key players in this category include Wealthfront and Betterment (along with FutureAdvisor, though it only reported $13.4M on its latest ADV as of September 2013, compared with recent announcements of $500M of Betterment and $800M for Wealthfront).

• Technology Platform for Advisers. In a notable pivot, Betterment was the first to break ranks from the other robo-advisers and offer an “Institutional” version of its platform to partner with advisers. Called Betterment Institutional, the platform will offer all the investment management, trading, and technology support of the Betterment direct-to-consumer platform, but in a private-label version that’s available for advisers to offer to their clients.

• Technology-augmented Humans. In this category are the “robo-advisers” staffed by real human advisers who are simply delivering their solutions from a technology-augmented platform, for either an AUM fee or a flat monthly fee. Notably, because these platforms ultimately deliver human advisers to work directly with clients, simply on a virtual basis, they are arguably not really “robo-advisers” at all, but simply technology-augmented humans (or “cyborg” advisors), not unlike a number of traditional advisory firms that are capable of working with clients virtually. Key players in this category including Personal Capital and LearnVest.

So what do you think? Which business model and value proposition will win? Will it be the technology-augmented human advisers or the platforms that help human advisers run their own firms more like a robo-adviser on their own? Will the online portfolio manager solutions be able to get clients to change their behavior and stay the course in a bear market? Will the suggestions-to-do-yourself model gain traction or stumble? Or is there room enough for all of them to co-exist and survive and thrive?
Michael Kitces is a partner and director of research for Pinnacle Advisory Group, and publisher of the financial planning industry blog Nerd’s Eye View. You can follow him on Twitter at @MichaelKitces, or connect with him on Google+.