Assets managed by digital advisers grew 10% over the first three quarters of 2019 to reach a total of $283 billion, according a new report from Aite Group, a consulting firm.
While that trails the 15% growth rate in 2018, Aite maintains its forecast that the robo-advice market will reach $1.26 trillion by the end of 2023 as market forces encourage firms to manage assets digitally.
Full-service wealth management firms remain the segment of the digital advice market that is growing the fastest, although such firms control only 8% of assets.
John Hancock's Twine grew 14% in the first three quarters of 2019 and breached the $1 billion AUM milestone. This year also saw
JPMorgan and
Voya enter the digital advice arena.
Aite Pirker, research director of Aite Group's wealth management practice, believes this will continue being the fastest growing segment of digital advice as large financial institutions migrate "digitally viable assets" — one-quarter of the assets in accounts with less than $1 million — to their robo-advisers.
"Many factors will push full-service firms to grow their digital assets, such as the potential for regulations that may require changes to product offerings to mass-affluent clients, strategies behind down-market servicing, and client demand for digital investment tools," Mr. Pirker wrote in the Aite report.
He also expects zero-commission trading will be a boon for the robo-advisers offered by discount brokerages.
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The discount brokerages already control 35% of digital assets, led by the $43 billion in assets on Charles Schwab's Intelligent Portfolios (which is up 29% since 2018). But Mr. Pirker said this segment can gain an additional 10 points in market share by 2023.
[More: Schwab hybrid robo sees early success with subscription pricing]
"The loss of millions of dollars of commission revenue, along with a long-term shift to fee-based revenue, will likely serve as a catalyst for growth on the fee-based digital investment platforms of discount/online brokerages," he wrote.
Mr. Pirker pointed out that several discount brokerages made upgrades to their digital advice offerings before the early October move to zero-commission trading, such as Schwab
launching Intelligent Portfolios premiums and Merrill adding
human advisers to its Guided Investing robo. While connecting the moves is only speculation, Mr. Pirker said it is clear these firms see digital advice as key to their business model as revenue shifts away from commissions.
"Digital investment solutions, which are fee-based, lock in steady revenue from management fees on assets and may also appeal to existing clients, historically accustomed to DIY trading, and who may be looking for low-cost
portfolio management and adjacent services, such as
financial planning," he added.
Vanguard Personal Advisor Services remains the biggest robo on the block with $115 billion in AUM, up 8% so far this year. Yet AUM remains low at other consumer-facing robos offered by product manufacturers, and it remains to be seen if asset managers other than Vanguard can move the needle.
[More: Vanguard digital-only tool could pinch Wealthfront, Betterment]
Startups account for 16% of digital assets, or $45 billion. The five biggest companies —
Betterment,
Wealthfront, Personal Capital, blooom and Acorns — collectively manage 89% these assets.
Over the next five years, Mr. Pirker expects the startups to lose about two-thirds of their current market share as competition and growth challenges accelerate.
To survive, they will have to continue to evolve their business model, as they did in 2019 by adding checking and savings features.
"Startups must actively look to remove pain points that clients of financial institutions face," Mr. Pirker said. "Progressing financial planning, hybrid advice, and banking offerings will be critical"
