Discount brokerages and traditional broker-dealers aren’t the only
The Federal Reserve’s policy also pumped the brakes on what had been a powerful growth engine for digital advice startups.
In 2019, nearly every major robo advisor pivoted toward cash management and banking services, offering some of the highest yielding savings accounts on the market. The strategy proved successful, with companies like Wealthfront and Betterment touting surges in new clients and assets — even as they faced increased competition from automated investing services launched by traditional financial institutions.
Then in March, the Fed made its move to help get markets through the ongoing COVID-19 pandemic. Cash returns offered by robos plummeted and now trail behind high-yield accounts at several online banks,
With no indication from the Fed that rates will rise any time soon, the robos may be losing a key client acquisition tool, says David Goldstone, manager of research and analytics at Backend Benchmarking.
“I imagine in the low rate environment that growth has significantly slowed. Cash just isn’t as attractive,” says Goldstone.
Wealthfront first launched cash accounts in February 2019 and
Wealthfront did not respond to multiple requests for a comment.
Betterment countered its rival with its own suite of banking services, including a savings account with a promotional 2.69% APY rate. The high-yield account attracted $1 billion in just the first week, says Betterment President Mike Reust.
Before the Fed cut national rates to zero, Wealthfront was offering 1.27% APY while Betterment had 1.37%, according to data collected by MaxMyInterest, a fintech that connects retail investors and financial advisors to high-yield cast accounts.
Now, the robos offer rates of 0.35% and 0.40%, respectively.
The reason robo interest rates fell so much lower than those of online banks is because digital advisors put cash brokered deposit accounts, which are tied directly to the federal funds rate, Reust says. The March rate cut forced digital advisors to follow suit immediately, while traditional high-yield savings accounts could move rates at their discretion.
Reust wouldn’t share specifics but acknowledged that cash accounts currently “are not the growth engine they’d be in a higher rate market,” before adding that they still provide “healthy growth for Betterment.”
Fiduciary problems?
But Gary Zimmerman, CEO of MaxMyInterest wonders, given the current low yield, if robo advisors are potentially violating their fiduciary duty by recommending their own cash accounts to clients instead of a third-party savings account with a higher rate.
(Disclosure: Zimmerman is married to Financial Planning editor-in-chief Chana Schoenberger)
“If you look at the tactics used around cash, it’s the same old tricks that broker-dealers used to bolster profitability at the expense of the client, Zimmerman says. “It would seem like there is a conflict of interest there … It’s concerning to see institutions that are registered as an RIA behaving as a broker-dealer.”
Dan Stampf, vice president of Personal Capital Cash, says that as a fiduciary, his firm lets clients know that there are other FDIC-insured accounts that offer higher rates than Personal Capital’s. However, digital platforms can offer other benefits with cash beyond interest rates, such as higher FDIC insurance and convenient money movement between other accounts, Stampf says.
“We can, and do, express the flexibility and security of our offering versus others,” Stampf said in an email.
Optimistic outlook
Robos are also introducing new ways for automation to optimize how clients deploy their cash, says Backend Benchmarking’s Goldstone. Wealthfront, for example,
Goldstone adds that even if robos don’t offer the best interest rates on cash, they’re still higher than the national average savings rate of 0.09% offered by banks and offer perks like no ATM fees, minimums and rewards.
“I think the story is larger than just about assets,” he says. “They’re building to handle a larger diversity of personal financial products.”
The robo sector’s ultimate goal is offering a single platform that can handle all of a client’s financial needs, says Scott Smith, director of advice relationships at research firm Cerulli Associates. The demand is there: more than half of affluent investors say they want a single financial services provider, but only 27% have made that switch, Smith says.
“Moving banking is hard and annoying when you have multiple direct deposits and payments, for example,” Smith says. Firms that address this opportunity can build deeper, stickier relationships with clients, he adds.
Client acquisition has been a perennial problem for the robos, says Goldstone, but the startups have consistently proven that they can stay a step ahead of the traditional industry.
The Fed is just making things a little more difficult.
