Why robo-advice benefits from free financial planning

The new wave of free financial planning apps will continue to fuel increased adoption of robo-advisers across the U.S., according to Backend Benchmarking’s third quarter Robo Report released Tuesday. 

In recent months, an influx of firms introduced free applications in a move to cross-sell products and increase their wallet share with younger investors: Fidelity released Spire, Charles Schwab launched Schwab Plan and Bank of America rolled out Life Plan. 

By increasing access to financial planning, these companies are creating a natural funnel from a free service to other offerings — like digital advice products, according to David Goldstone, head of research for Backend Benchmarking. For example, Life Plan — which gives three million clients access to Bank of America advisers — creates a path for those clients to gain interest in investing through Merrill Edge. 

“Across the industry, firms are trying to attract clients earlier in the wealth accumulation process than ever before,” Goldstone said. “Digital advice products have already brought minimums to near zero while free-trading has removed commissions across the industry. Now firms are finding new ways to attract clients into their first investing relationship.” 

However, offering free versions of these tools begs the questions of whether it will decrease the attractiveness of paying for premium planning services, according to Goldstone. “Increased competition in the industry will benefit the end customer as costs come down and digital tools increase in accessibility and quality,”  he said.    

While the adoption of robo-advisers across the U.S. has increased 8% this year, according to a study by Hearts and Wallets, that percentage is expected to grow as the trend of coupling banking alongside investment services continues. 

Schwab reported that 13% of its clients had money invested in its digital platform, while 10% of Vanguard and Fidelity clients reported the same, according to the study, but there’s still substantial room for growth. 

“This underscores a theme that, instead of focusing on winning against the competition, incumbent firms can continue to cross-sell across their existing clientele,” the report noted. 

While digital advice is perceived to mostly attract clients who are new to investing or have low amounts of assets, robo-advice is proving to resonate the most with young wealthy clients. In fact, nearly half of Millennials with more than $500,000 to invest are using a robo-adviser, according to the report. 

When looking at households with investable assets between $50,000 and $500,000, the report found more than 20% of Millennials said they use a robo-adviser, outpacing Generation X (15%) and Baby Boomers (5%). 

While robos have yet to take on a significant market share from traditional advice, the battleground for clients is something advisers should pay attention to, according Goldstone.