The commoditization of the robo adviser

As online advice firms mimic each other, they will come under pressure to differentiate themselves with more services and lower costs

Apr 6, 2015 @ 1:31 pm

By Alessandra Malito

Betterment has begun offering its tax-loss harvesting service to all its clients with no minimum balance, following Wealthfront's announcement two weeks ago that it would offer such a service by the end of this month.

The mirroring of the announcements may be yet another indication of the commoditization to come in the robo-adviser space.

There has been a domino effect since Charles Schwab & Co. unleashed its disruptive Intelligent Portfolios robo-adviser in the automated online investing market. Since then, companies like Wealthfront and Betterment have locked horns with Schwab as well as each other.

In the process, established and emerging robo-advisers have begun to mimic each other, either through similar features or by echoing statements ripping into their bigger competitors.

"Eventually the products will all be free and all offer the same thing," said Mike Kane, chief executive of Hedgeable, also a robo-adviser offering.

Betterment's recent announcement on tax-loss harvesting includes the company's ability to trade in fractional shares, meaning it will take smaller pieces of exchange-traded funds for customers, and in turn manage smaller lots for customers with smaller balances.

"We can do it better than anyone else," said Jon Stein, chief executive of Betterment. "Many will try, but no one can do it the way that Betterment does it."

Wealthfront's CEO Adam Nash announced at the end of March the company was rolling out its tax-loss harvesting feature to all clients in April, but Mr. Stein said the difference between the two companies is that Betterment has already started the process and Wealthfront hasn't.

"Even when they do get around to it sometime later this month, they are not making it accessible to everyone," Mr. Stein said. "They have a minimum balance and they can't do it the way we are doing it, so it's not very useful to people with smaller accounts."

Mr. Nash said offering tax-loss harvesting to all of its clients was an example of Wealthfront leading the way, and that the company was happy to see the industry react.

“At Wealthfront, we’re proud that the features we bring to market have come to define our category,” Mr. Nash said. “Our mission isn’t just to provide better value and service to our clients, but to force the entire industry to do the same.”

April Rudin, founder of the marketing firm Rudin Group, said she expects to see robo-advisers continue to try and match each other's services.

"I would expect these announcements to happen very frequently," Ms. Rudin said. "The bare minimum that these firms can offer is changing."

The only way to tell which will be successful is by waiting to see how many people use which services, she said.

And in order to gain more clients, robo-advisers will have to home in on specific skills to survive the commoditization of the industry.

"Many of them are going to struggle," said Lee Kowarski, vice president of kasina, a financial services research firm. These automated online platforms "need to ultimately try to win a competency or niche."

Now more than ever the companies will need to find ways to be different, not the same.

"When there was only one or two players to compare against traditional investing options, it was enough to be different," Mr. Kowarski said. "But now they have to tell a story about why they're going to be better suited to provide returns at a lower cost with better service."

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