Robo-advisers prepare for market downturns by offering more sophisticated services

Corporate Insight study shows how leading online startups are shoring up their business models

Jul 24, 2014 @ 12:30 pm

By Joyce Hanson

Robo-advisers, online wealth management platforms, advisers,
+ Zoom

Automated online investment advisers are coming of age, and as these so-called “robo-advisers” grow in sophistication, they're gathering more assets, diversifying their businesses and in some cases adding a more human touch, a new study shows.

The growth includes a shift from free to paid services, new business-to-business-to-consumer partnerships that allow for third-party distribution and a greater focus on financial planning, according to the study, “Transcending the Human Touch,” to be published in August by market research firm Corporate Insight.

Most of these new platforms have enjoyed the benefits of a bull market and have never weathered a serious market downturn, said report author Grant Easterbrook, a Corporate Insight analyst who has spent several years opening accounts with dozens of online advisory platforms, testing them and talking to the firms' executives.

To withstand any potential correction, these online startups are shoring up their business models by diversifying their revenue streams so they're not solely dependent on consumer accounts, Mr. Easterbrook said. Their challenge is to figure out ways to earn investor trust and loyalty over the long term.

“Only time will tell how these firms will do in a downturn,” he said. “If you're an adviser out in Long Island, for example, you can meet people, and clients get to know and respect you. But in the online world, it's harder to build up that trust because you don't have an adviser who meets you face to face. People are just meeting you online.”

Still, next-generation investors are learning to trust online platforms, Mr. Easterbrook said, noting that in his recent survey of the 11 leading startups, the total assets under management or advisement has risen steeply from $11.5 billion in April to $15.7 billion, a 37% increase.

Mr. Easterbrook said the robo-advisers are not the same, and each is finding a unique way to fortify its balance sheet. For example, he said, Jemstep Inc. is reaching out to a variety of financial firms and putting together business distribution partnerships to make it more stable in a downturn.

Jemstep President Simon Roy said his firm's platform offers services directly to advisers as well as retail consumers and is seeking to increase its client base and assets under management by working with advisers.

“There is a large group of investors who see the benefits of online technology but who also want to work with advisers,” Mr. Roy said.

Like Jemstep, online platforms Financial Guard and Future Advisor offer retail investors automated buy-sell-hold advice and use account aggregation to scrape customer data and tell investors how to trade, Mr. Easterbrook said.

But also like Jemstep, he said, these platforms are becoming more sophisticated by offering paid services and distribution partnerships. Future Advisor in September rolled out a service that takes discretionary control of accounts from customers. Financial Guard is developing a discretionary service.

Personal Capital, meanwhile, is growing by offering a more personal touch, Mr. Easterbrook said.

“They give some free automated advice to lure prospective clients, but if you go for the paid service, you work with an adviser who is actually assigned to you,” he said.

And while the leader in the online space, Wealthfront, which recently surpassed $1 billion in AUM, is keeping mum about its future plans, it's clear that the firm is paying attention to where it's headed beyond offering exchange-traded-fund portfolios to Millennials, Mr. Easterbrook said.

“Long term, there's all kinds of ways to make Wealthfront more lucrative,” he said. “You build up the client base, then over time as that client base gets older and richer and their needs become more sophisticated, you make more sophisticated services when they need more than a portfolio of ETFs based on an online questionnaire.”

An earlier version of this story misstated the status of Future Advisor's discretionary account service. It was introduced in September.

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