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

Apr 21, 2014 @ 11:37 am

By Michael Kitces

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+.

0
Comments

What do you think?

View comments

Upcoming event

Oct 22

Conference

San Francisco Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

Vermont establishes restitution fund for victims of investment fraud

Portion of settlements with financial perpetrators would supply the pool.

10 IBDs with the most variable annuity revenue

Although the popularity of VAs has declined in recent years, some independent broker-dealers still do a good business in them.

Target-date fund design may be wrong for retirees

Researchers suggest the funds don't adequately hedge against sequence-of-returns risk in retirement.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print