Should Robinhood's robo play be a concern for TradePMR's RIAs?

Just a few weeks after officially completing its acquisition of RIA custodial platform TradePMR, Robinhood revealed its next major step toward wealth management legitimacy by announcing its own low-cost robo advisor.

While the digital investment giant touted the launch as a win, it does beg the question: could it undercut business for the many RIAs that TradePMR has pre-established relationships with?

Mike Watson, SVP and head of RIA custody for Axos Advisor Services, sees the move is "a little bit of a head-scratcher."

"I do think it is a bit interesting that the ink isn't even dry on the deal with TradePMR, and then they go out and announce that they're going to go direct-to-consumer from an asset management standpoint. So it is a little bit of a head-scratcher," Watson told InvestmentNews in a recent interview.

Rather than buy-and-hold investors, Watson argues that the typical Robinhood user is likely to be using side cash to make short-term trades or speculative bets.

"Whether it's sports gambling, maybe it's crypto types of investments ... and my financial advisor would never let me do this under a professionally managed account," he says.

On the other hand, Watson says Robinhood's robo offering could appeal to individuals who are interested in a digitized solution focused on portfolio management. The best-fit customer persona, he says, would tend to be those who are further along in wealth accumulation mode, with smaller portfolios that are sizeable enough for them to want managed in an automated fashion.

"[I think Robinhood was] looking at their existing retail client base and saying, 'How can I provide a sort of iterative solution before full-scale wealth management?' which would be where the advisor, the RIA business, comes into play," he says.

According to Robinhood's website, the Robinhood Strategies offering comes with a management fee of 0.25 percent, which would land it squarely on the median line in a February ranking of robo advisors published by Morningstar. For members of its Gold subscription service, Robinhood says the 25-basis point fee is applied to the first $100,000 of investable assets in their account, and every dollar beyond that will incur a zero percent management fee.

In an interview with CNBC following the robo advisor launch, Vlad Tenev, CEO of Robinhood, argued the fee structure would be particularly compelling for investors with multimillion-dollar accounts that are being managed by a traditional advisor, as making the switch would create savings amounting to tens of thousands of dollars annually.

"We figured out that traditional advisor models leave two sides of the market deeply dissatisfied with the service: the folks starting out who aren't really getting good, high quality, personalized advice, but also the people who have been loyal customers of the advisor for decades and whose portfolios have grown and they're basically paying more and more for the same exact service," Tenev said to CNBC.

While Robinhood's robo advisor requires a minimum investment of $50, that would only put an investor in a portfolio of ETFs; those seeking a mix of ETFs and individual stocks would need to invest at least $500. Investors also have the option to open a regular individual account, a traditional IRA, or a Roth IRA, which would be overseen by a team of advisors "with over 50 years of collective investment experience, working with both institutional and high net worth clients."

Robinhood says its robo makes tax-optimized investment decisions, limiting taxable gains by strategically choosing which shares to sell, and which ones to hold. It says the team under the hood will continuously manage investors' portfolio, updating it when needed based on their profile, the team's views, and prevailing conditions in the market.

All positions are evaluated through the quantitative part of the portfolio management process at least monthly, though investors will not have direct access to the Robinhood Strategies advisor team. That puts it firmly behind the leading robos in Morningstar's ranking, which included Vanguard, Fidelity, and Betterment.

Given the limited nature of Robinhood's robo service, it doesn't seem advisors should feel overly threatened. And while RIA advisors at TradePMR might not necessarily be "over the moon" after the launch, Watson says the robo could serve as a useful middle ground.

"Perhaps that's the [reason behind the]introduction of the robo solution, so that they could have this sort of continuum of services from highly speculative to highly stable and everything in between," he says.