Vanguard’s robo advisor may soon have competition at the top.
The firm’s Personal Advisor Services still claims the largest portion of digital client assets, topping $106 billion in AUM last year. But competing offerings from discount brokerages — like Schwab’s Intelligent Portfolio — may soon vie for the crown, according to the
“Our position is that online brokers will be the dominant factor moving forward,” says Aite Group senior analyst Alois Pirker, citing a portion of the $6 trillon on brokerage platforms expected to transition to fee-based advice. In fact, discount brokerages are expected to control the plurality of robo advisory assets by 2023 — cornering almost half of all digital assets, according to the study.
On the other hand, product managers like Vanguard are expected to account for roughly a third of all digital assets, setting up a head-to-head matchup between two of the industry’s most dominant digital players.
Low-cost investing pioneer Schwab now manages more than $3.5 trillion in client assets. The firm began
Schwab currently manages $33 billion in assets through its Intelligent Portfolio platform, according to the study.
“The online brokerages are some of the fastest growing franchises in the industry and has been for the past decade,” Pirker says. “There is a lot of pent up demand for portfolios.”
Nearly 60% of Americans expect to use a robo advisor by 2025,
“Advice is not a ‘one size fits all’ proposition,” a Vanguard spokesman wrote in an email. “The spectrum of advice offers and models will continue to evolve and improve — all of which will benefit investors. Ultimately, advice can help investors achieve better outcomes, and the more access to it, the better.”
In total, assets managed on digital platforms are expected to soar to $1.26 trillion by 2023. The shift toward fee-based advice and an anticipated fiduciary standard will likely further drive assets onto digital platforms, Pirker says. “When you look at the composition of any advisor, there is a certain share of the accounts that are just too small to be profitable,” he says. “Even at the largest and most profitable firms.”
Schwab grew digital assets by 23% year-over-year, according to the firm. "We are confident in our growth in robo assets, but any player broadening access to planning and advice to more people is a good thing," says a Schwab spokesman in an email.
With a
J.D. Power’s annual survey of self-directed investors displayed generational differences and the impact of equity volatility.
Mutual fund companies, including Vanguard and BlackRock held the most assets with 42.1% of total digital AUM last year, according to the study. Discount brokerages, like Schwab and E-Trade, held 34.6%. Advice startups like Betterment and Wealthfront accounted for just 15.9%.
Ominously for the robos, all four of the market exits cited in the report were startups.
“Moving forward it will become even more difficult for independent robo-advisors to achieve profitable growth, considering the very high cost of customer acquisition,” says Roi Tavor, CEO of the research firm Nummo that
Due to valuation considerations and the fact that all major incumbents already or are planning to offer digital financial advice, the road to continued growth for many independent robos seems steep, Tavor says. “An IPO might be an option,” he says. “However, asset bases would have to increase substantially first.”
While industry projections differ on the exact amount of digital assets coming to robos, the need for digital advice will likely continue to drive clients toward more efficient and cost effective options, he says.
The incumbent players will likely continue to grab assets and dominate the online advice landscapes, according to the study.
“Given the continuous cost pressure financial institutions experience, a further shift from human to digital advice must be expected,” says Tavor. “And with the rapid transfer of wealth from baby boomers to the next generation, [AUM projections] could be significantly higher.”
