Custodians jump into the robo game

New tech offerings designed to help advisers compete against online investment managers

Oct 20, 2014 @ 11:20 am

By Joyce Hanson

Custodians, those longtime third-party guardians of customer securities, are launching new products that give traditional registered investment advisers the technology to compete against so-called robo-advisers.

In August, custodian Folio Institutional launched Advisor Connexion, an automated online platform offering advisers low-cost, web-based account management and the ability to attract smaller accounts with lower minimum requirements. For a negotiated fee of approximately 25 basis points to cover trading and custody, advisers who use Folio's platform get robo tools such as online client account sign-up, risk-tolerance questionnaires and automatic portfolio rebalancing.

“We've launched a robo platform that's applicable to advisers,” said Folio Institutional President Greg Vigrass, adding that Advisor Connexion lets RIAs custom-build model portfolios with a range of securities, including stocks, bonds and exchanged traded funds.

“Five years ago, advisers dismissed robos as nothing,” Mr. Vigrass said. “Fast forward to now, and robo platforms are the biggest things going. Why wouldn't a traditional RIA not want the same functionality and technology that's driving the robo movement?”

About 20 RIAs with approximately $750 million in assets under management have signed onto Advisor Connexion since its launch, Mr. Vigrass said.

If Advisor Connexion sounds a lot like established online portfolio managers such as Betterment and Wealthfront, that's because it is — by design. And Folio Institutional is not alone among custodians joining the “robo-adviser for advisers” trend.

Fidelity Institutional Wealth Services, for example, made a big splash in RIA circles on Wednesday when it announced that it was among the first to sign up for the Betterment Institutional platform that connects advisers and clients online. Leading custodial player Charles Schwab Corp., meanwhile, announced in July that it is fast at work on a “groundbreaking” robo platform for advisers. And another leading custodian, TDAmeritrade Institutional, has integrated its automated portfolio rebalancing and tax-loss harvesting software, iRebal, into its Veo platform for advisers.

Mark Piquette, chief marketing officer of custodian Trust Company of America, whose Liberty platform offers advisers client interactivity, account rebalancing and trade execution across all desktop computers and mobile devices, said that next-generation investors will inevitably change the advice business and drive it further online.

“In five to 10 years, the online advice channel will be a significant part of the advice business,” Mr. Piquette said.

To be sure, custodians aren't launching robo platforms for advisers out of the goodness of their hearts. They fear losing advisers' business just as much as advisers fear losing customers to online competitors.

According to Michael Kitces, partner and director of planning research for Pinnacle Advisory Group, custodians along with broker-dealers, asset management and technology firms risk being “disrupted” by robo-advisers even more than human advisers do.

“Most financial advisory firms have zero software developers,” said Bo Lu, a former product manager at Microsoft Corp. who co-founded direct-to-consumer robo-adviser FutureAdvisor. “We have a firm that is mostly engineers. The pyramid is entirely reversed.”

“Custodians see that if they can be the one place that advisers can come to most effectively compete against digital investment managers like ourselves, then they stand to gain a lot of adviser business,” Mr. Lu said.

FutureAdvisor custodies its $240 million of assets under management with Fidelity and TDAmeritrade Institutional, according to Chris Nicholson, the firm's head of communications and recruiting.

But not all online investment managers custody their assets with the leading custodians — which is another reason why custodians are launching robo advisers for advisers.

The two online investment managers with the highest AUM, Wealthfront at $1.4 billion and Betterment at $875 million, custody or clear with Apex Clearing Solutions, a company that got its start in 2012 when clearing firm Penson Worldwide shut down. Much of Penson's business was transferred over to Apex.


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