Look out for these robos in 2016

Big firms target next year to join robo ranks, look to differentiate as market becomes crowded

Nov 11, 2015 @ 12:21 pm

By Alessandra Malito

If the word robo wasn't thrown around enough already, just wait until 2016.

This year has been a whirlwind for automated investment technology, a growing trend for any firm aiming to expand its business. Custodians, independent broker-dealers and traditional advisory firms alike are arming themselves with robo-adviser technology not only to remain competitive with their peers, but attract smaller accounts and younger clients.

Firms lining up their own robo-platform in the next 12 months include LPL Financial, Wells Fargo, Commonwealth, Cambridge and most recently, Merrill Lynch. Others that have expressed interest include Morgan Stanley and RBC Wealth Management.

"We do think that this is going to be a very common trend," said Sean McDermott, an analyst at Corporate Insight. "We will see majority of financial services institutions buy into it."

That's because firms are starting to catch on to the opportunities such automated investment platforms provide. Start-ups including Betterment and Wealthfront showcased the reach this technology could have to smaller and younger clients, and institutional incumbents like Charles Schwab & Co. and Vanguard proved its promise when they launched their own versions with great success.

BIG GROWTH

Both platforms for the two have grown tremendously since coming out in March and May, respectively. Schwab Intelligent Portfolios hit $4.1 billion and Vanguard Personal Advisor Services has $26 billion in AUM, as of Sept. 30.

Both also incorporate financial advisers — Schwab has Institutional Intelligent Portfolios and Vanguard's robo is a hybrid model.

Bank of America Merrill Lynch plans to follow suit.

"Our goal is to provide financial advisers with a broader set of products to better serve clients," said Kristen Georgian, a spokeswoman for Bank of America.

The company has not announced any specific details on its upcoming platform.

Wells Fargo Chief Financial Officer John Shrewsberry said the company was considering a robo-adviser during its second quarter earnings release in July, to compete with those already in the industry.

CONSUMERS ADOPT CYBER MENTALITY

Mary Mack, president and head of Wells Fargo Advisors, said during a SIFMA conference on Nov. 10 that consumers are adopting a cyber mentality

“Robo, I think, has a place, if you think about the on-ramp to investing,” Ms. Mack said.

Darren Tedesco, managing principal of innovation and strategy at Waltham, Mass.-based Commonwealth Financial Network, said Commonwealth's robo offering will come in the second half of next year. The company is not in a rush because it already has most of the components a robo-adviser offers. Instead, the company is looking to package its existing services and add tax-loss harvesting and financial planning.

"[We want to] allow it to be goals-driven, instead of investment-driven," Mr. Tedesco said.

He said most of the robo craze comes from marketing pressure.

"We spent a lot of time talking to our advisers and we only have a couple who are pushing for it," Mr. Tedesco said. "Most people are curious about it and want to have that arrow in their quiver."

Robo-adviser assets are expected to grow to $489 billion in assets under management by 2020, up from $18.7 billion in AUM now, according to a Cerulli Associates Inc. study. That's a growth of 2,500%, which the study attributes to major retail firms jumping into the robo-adviser pool.

DIVERSIFICATION NEEDED

Mr. McDermott said with all these firms coming out with robos, there will have to be diversification. Betterment did it by finding new channels of business, such as its institutional side and new 401(k) offering coming out next year. For other companies, it may be moving beyond passive investing and having more complex investment strategies.

"Increased competition will drive innovation," Mr. McDermott said. "It will force some of these smaller more nimble firms to innovate and to find that next great tech offering."

Mark Schoeff contributed to this report.

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