Robo report: Traditional advisers may be biggest market for online investment services

Younger investors could spend billions of dollars for financial advice online, according to a new report, but the biggest consumers of these services may be traditional firms looking to expand.

A recent report by the consulting firm Aite Group found that if the investors between 20 and 49 who say they would pay for low-cost online advice did so today, firms in that space could realize a total of $2 to $4 billion in annual revenue. Firms that provide more active investment management services or help advisers digitize their offerings could see several billion dollars more in revenue.

The report, which looked at 18 of the dozens of online advice platforms, cautioned that a massive shift in behavior would have to occur before investors will feel comfortable with a new model for financial advice.

The firms, most of which are new, need to find workable business models. Most of the start-ups are not yet profitable.

The online firms range from LearnVest Inc., which provides holistic financial planning advice, to Wealthfront Inc., which uses computer algorithms to manage portfolios.

These firms’ software development has made them rich in “intellectual property, which they could white-label down the road if their direct-to-consumer businesses do not meet revenue goals,” the report said.

Even with generous estimates, the market pales in comparison to wealth management incumbents. Bank of America Corp.’s wealth management division alone brought in $17.79 billion in revenue last year.

But the report’s author, Sophie Schmitt, said factors favoring online firms include the debate over whether everyone giving retail investment advice should be held to a stringent fiduciary standard.
She said the financial crisis also “reduced the allure of the financial adviser and increased the attraction of investing with a more objective and consistent technology-based proposition.”

That is said to be especially true of younger customers, including the demographic group born starting in the early 1980s, often called Millennials.

“The Millennials love it, and the Millennials are getting rich,” said Jeffrey C. Spears, a consultant and chief executive of Sanctuary Wealth Services. “Surprisingly enough, they don’t like talking to people; they like talking to you on Twitter.”

That represents a sea change from the 1990s, when discount brokerages were seen as the main disruptive threat to financial advisers, according to Ms. Schmitt’s report.

“This decade is seeing a new type of online investing emerge in the form of investors who are comfortable delegating investment management services to a software program overseen by a few investment experts (experts with whom they have no or little interaction).”

Several of the firms are being boosted by a marketing strategy around personal-finance content delivered through blogs and social media. And the fact that investors can try out services such as SigFig Wealth Management and FutureAdvisor.com, both of which are SEC-registered investment advisers, “for free before committing to a paid service should unsettle established wealth management providers,” according to the report.

But after touchy statements questioning the value of incumbents, some firms, like Betterment, an offering backed by both an RIA and a broker-dealer, have increasingly welcomed independent financial advisers into the fold with strategic partnerships.

“There are a lot of advisers looking for platforms and technology,” Jon Stein, the founder and chief executive of Betterment, said in a recent interview. “We’ve had a lot of inbound interest from them in using our platforms.”

Other firms have structured part or all of their business models around helping advisers do better, and some are run by incumbents themselves, such as the online offerings from Edelman Financial Services and Savant Capital Management.

Personal finance services that work through advisers are likely to have lower, but more predictable, growth trajectories than other firms “because advisers must offer digital services,” according to the report. Those offerings include Balance Financial, which is available through TD Ameritrade Inc.’s Veo platform for advisers, or Wealth Access Inc., which has made inroads with ultrahigh-net-worth advisers such as family offices.