The Department of Labor's fiduciary rule is going to force asset managers to turn to digital advice, by buying or partnering with a robo-adviser or finding ways to get on the investment product line-up.
Because the fiduciary rule forces financial advisers to act in their clients' best interests on retirement accounts and steer away from commissions-based products, these companies need to find innovative ways to keep their products front and center for advisers and their clients, said Rob Foregger, co-founder of NextCapital, a digital platform that provides advice to defined-contribution plans.
Enter the robo-advisers.
"[Asset managers] believe they have a good product but need to wrap their product in a solution," Mr. Foregger said. "They have to do fee-leveling but are moving away from the manufacturing of products to advice."
As asset managers see more fee compression, due in part to the changing regulatory environment and more passive products, they will rely on technology to gain back lost fees, at the expense of wealth management firms, a Cerulli Associates report stated. At the same time, these companies will move toward providing, and monetizing, an advice layer, Mr. Foregger said.
A few asset managers have gotten a leg up on this trend. BlackRock, for example, acquired San Francisco-based robo-adviser FutureAdvisor last summer, and has gone on a spree of partnerships with other large financial firms and institutions since. Vanguard rolled out hybrid-robo Vanguard Personal Advisor Services last spring. Fidelity is working on its own robo, currently in beta. And earlier this year
Invesco acquired Jemstep, a business-to-business digital advice company, that's also now sparking partnerships of its own.
Robo-advice platforms are
expected to reach $489 billion in assets under management by 2020, an increase from the $18.7 billion in AUM today, according to another Cerulli Associates report from last fall.
Having a digital advice platform — or working closely with one — doesn't guarantee these firms' products are top of mind, but it is worth noting that, as more and more investors flock to online services such as these, they'll have a better shot getting their funds seen and chosen.
"You may not be able to use their service to place your fund at the exclusion of other funds, but you can get your funds on the menu," said Sean McDermott, an analyst at research firm Corporate Insight.
Robo-advisers are attractive to asset managers for other reasons as well: investors with small and large amounts of assets to invest will be using these platforms, and digital advice is getting cheaper to use, experts said.
Another value add: younger clients will expect more technology-friendly services from their advisers and financial firms, and robos are perfectly in line with handling small balances.
Matthew Fronczke, senior executive consultant and head of consulting at kasina, said competition for these companies will be tight since there is only so much space in the industry.
"There are a number of high-profile players in the marketplace already competing in the business-to-business tech space," Mr. Fronczke said. "One of the things about digital advice is it is a scale-based business."
So for those institutions not yet in the game, it may be a little too late, he said. In that case, asset managers will have to make sure they're offering extremely competitive low-cost funds, Mr. McDermott said.
"It is going to be difficult," he said. "They can no longer rely on compensation to advisers to get agreements for preference for their funds."
In order to gain attention on robo-adviser systems, these firms will have to reassess their products and make necessary changes to fit in line with what is best for the investor.
Although asset managers with robo-advisers are working primarily in the business-to-business realm, in a way, they are also inching closer to investors themselves.
"It's almost a direct relationship without the intermediary," Mr. McDermott said. "It creates a lot of questions and interesting dynamics in the industry."
