BattleBots: Big firms run past startups in the robo race

If attaining the most assets under management is the name of the game, then start-ups in the robo-adviser space are not winning.

In Charles Schwab & Co.’s recently released second-quarter results, the company states that its own robo-advisory service, Intelligent Portfolios, and the adviser-facing version, Institutional Intelligent Portfolios, combined crossed the $3 billion mark in assets. That outpaces robo pioneers like Wealthfront and Betterment — with $2.5 billion and $2.4 billion under management, respectively — that have been around since 2008.

Vanguard Personal Advisor Services, a hybrid robo that mixes an online automated investment platform with an adviser call center, came out of beta in May and has already reached $21 billion in AUM.

Schwab’s retail robo debuted in March.

The quick pickup of the two behemoths is attributable to a number of factors, but two in particular set them apart from their smaller counterparts: multiple positions in the industry and a recognizable brand.

It helps these bigger firms that both already had a huge loyal customer base before they launched their robo-adviser. Vanguard transferred $10 billion in client assets to its automated investment platform. Alison Wertheim, a Schwab spokesperson, said the firm is not reporting what percentage of Intelligent Porfolios’ AUM came from existing assets.

On top of that, they are using their own products, such as exchange-traded funds, which means they don’t have to charge a management fee like platforms such as Wealthfront and Betterment do. Schwab boasts a completely free platform, although investors do have to hold a minimum amount in cash.

“We think there are many people who see value in a low-cost, friction-free way to get quality advice from an established, trusted brand,” Ms. Wertheim said.

Vanguard charges 30 basis points for planning; it connects investors with human advisers, while Schwab’s does not.

Vanguard’s spokesperson Katie Henderson attributes part of its success to its hybrid nature.

“It incorporates a relationship with the adviser, and we believe in the value of an adviser,” Ms. Henderson said. “The role an adviser plays is not just to come up with a financial plan but also from an ongoing standpoint continuing to help a client when needed.”

While it’s not exactly a level playing field, the start-ups are staying competitive and continuing to add new incentives and features.

Betterment recently launched SmartDeposit, which checks an investor’s bank acocunt and automatically invests excess money above a predetermined baseline. Betterment spokesperson Joe Ziemer said the company has doubled the amount of assets it manages in the last six months.

Wealthfront just dropped its account minimum from $5,000 to $500 and claims it has had more clients sign up in the one week following the change than in all of 2012, according to spokesperson Kate Wauck.

On all of these platforms, “portfolios are basically versions of the same thing,” said Cullen Roche, founder of Orcam Financial Group. “I don’t see why anyone would use the service if they have to pay a premium for the same products in the end.”

Wealthfront, Betterment and the even smaller players in the robo-advisory space can consider strategic partnerships with firms that have their own line of ETFs. By doing so, they would be able to compete more effectively on price by not charging management fees, Mr. Roche noted in his blog, Pragmatic Capitalism.

There’s also the important factor that investors tend to stick to what they are comfortable with.

When average investors are giving their advisers a portion of their assets, there’s a good chance they’ll choose a name they already know, said Craig Iskowitz, chief executive of Ezra Group, a technology consulting firm in the financial advice industry. For smaller robos to catch up, they will have to spend “a massive amount of money” to boost brand recognition.

“While Wealthfront and Betterment are going to attract some assets, they are a ways away from the reach of Vanguard,” Mr. Iskowitz said.