Robo advice gets human, stirring competition again

With Schwab's hybrid robo adviser now live, the competition for digital wealth management clients is set to change again.

Over the past two years, there has been a clear divide in the assets of robo advice startups and the initial efforts of incumbent firms. But that partition could collapse, as the major players gravitate to one model and price competition takes hold.

Vanguard Personal Advisor Services had $10 billion in AUM even before it launched publicly in 2015, and it has maintained that lead among digital platforms ever since. Trailing but still touting a respectable amount was Schwab's first offering, Schwab Intelligent Portfolios, a completely automated solution. (Schwab's digital solution currently has over $10 billion in AUM).

Forming a separate cluster ranked by AUM are the independent digital startups, with Betterment the leader with over $7 billion, followed by Wealthfront, Personal Capital, and other offerings.

But by last year, firms realized that customers wanted a human touch with their digital solutions, and numerous analysts came to the conclusion that hybrid robo platforms would be the go-to model for digital wealth management.

Personal Capital and Vanguard opted to blend human advice with a digital platform, while Schwab Intelligent Portfolios, Betterment and Wealthfront presented automated advice.

• Automated investing
• Wealthfront
• Technology
• Vanguard
• Robo advisors
• Charles Schwab

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Then, in December, a surprise: Schwab announced it would launch its hybrid, Schwab Intelligent Advisory. Betterment then broke from its automated roots, launching a hybrid offering at the end of January.

Others have entered the online advice world directly with a hybrid robo offering, such as the offering from research firm Zacks Investment Management.

A LEVELING OUT
With most providers switching to hybrid advice platforms there's a potential for the digital wealth management field to level out.

When launching Betterment's hybrid offering, CEO Jon Stein said the firm was aiming upwards. "We've long considered Schwab and Fidelity to be our primary competition and have anticipated over time that we would inevitably become even more competitive with them," he said at the time.

Schwab's hybrid seems to be aimed at the leading competition as well, undercutting Vanguard's PAS with account minimums of $25,000 and fees capped at $900 a quarter. It's priced aggressively enough that even industry observers such as Joel Bruckenstein, co-creator of the Technology Tools for Today conference series, wondered if it was "the beginning of the commoditization of entry level planning."

It's worth watching over the next year whether that is enough to attract clients away from its rivals. And also worth considering if an influx of hybrid robos does usher in an advice price war, predicted two years ago by A.T. Kearney.

Scott Eells/Bloomberg

Custodians' digital platforms have looked to spur AUM growth by converting existing do it yourself clients into robo offerings, and then seek new clients.

The industry has recently witnessed a slashing of costs for online retail trading between Schwab, Fidelity, TD Ameritrade — when competition tightens for digital advice AUM after the bigger custodians convert their existing client base, could a similar scenario play out in digital wealth management?

Fidelity and TD Ameritrade, for those keeping track, have their own robo advice offerings now too, though they have been in soft launch up until now.

Another factor to keep in mind: the biggest banks are reinvigorating their PFM applications and developing their own hybrid robo advice solutions, keen to keep even small retail assets rather than seeing them leak to digital wealth firms or custodians.

As hybrid robos grow and clash, there are of course other ramifications for the advice industry at large.

Concerns about competition and conflicts of interest have been raised. There's also growing acknowledgement that the growth of hybrid robos will affect the career path for future wealth advisers. There's also the good possibility that costs associated with scaling wealth advice in the retail market will push hybrid robo platforms to introduce more AI-driven assistance in advice.

But driving the next chapter in the robo advice story will be the trajectory of hybrid growth and who manages to grow the fastest.