The robo-advice market is growing, but changing

Vanguard still dominates the market, but Aite Group expects increased growth among banks and discount brokerages

May 30, 2019 @ 2:24 pm

By Ryan W. Neal

The market for direct-to-consumer digital advisers continues to grow, according to a new report from research firm Aite Group.

Assets under management at direct-to-consumer digital advisers increased 15% in 2018, reaching a total of $257 billion by the end of the year. If this rate continues, robo-advisers' assets would surpass a half-trillion dollars in 2023.

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But Aite expects robos to expand much faster than that as more traditional wealth management firms invest in digital investment platforms. It predicts that $1.26 trillion in AUM in 2023 is more realistic.

Today the digital advice market is still dominated by Vanguard's Personal Advisor Services, which manages $107 billion. Other product manufacturers will continue entering the space, but Aite expects these firms will no longer have the largest share of the robo market in five years.

Instead, the researcher expects discount and online brokerages to lead the way and command as much as 46% of the market.

Alois Pirker, research director for Aite Group's wealth management practice, attributed this to the well-established, self-directed client base that companies like Charles Schwab, TD Ameritrade, Fidelity and E-Trade already have.

These firms currently only have about 1.7% of their total assets, or $89 billion, on digital investment platforms. Aite expects this total could rise to 6.7% by 2023.

"The portion of existing clients who are looking for low-cost managed portfolios will find strong solutions in place within these well-known brands," Mr. Pirker wrote in the report.

The biggest opportunity is for full-service firms launching robo-advisers to serve smaller accounts and expand into new markets. Banks like UBS,HSBC and U.S. Bancorp all launched products in 2018, and JPMorgan is expected to add digital advice to its self-directed investment platform, You Invest, this year.

Even Goldman Sachs looks to be getting into the game. It moved its online banking service, Marcus, over to its asset management division and is in the process of building a mass-affluent hybrid robo offering. The bank also recently acquired United Capital.

(More: What does a Goldman-owned United Capital mean for advisers?)

Aite expects compound annual growth of 64% in this segment as banks migrate accounts with less than $1 million in assets over to digital advice platforms.

Growth in digital advice offerings from traditional firms will put increased pressure on the digital startups, Mr. Pirker said. He expects startups will continue to grow modestly, but will ultimately cede market share.

"This segment, led by Betterment with US$13.5 billion AUM, is already being pressured by well-capitalized incumbent solutions and has a disadvantage in the lack of large existing client bases to fuel client acquisition," Mr. Pirker said.

Startups will have to differentiate themselves, he said, but they have the advantage of being relatively small, able to change and able to reach specific demographics that elude traditional firms. This could be driving the recent pivot by many robo-advice startups toward cash management.


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