The Future of Robo Advisors

Highlights:

• At $1 trillion in assets, robo advisors have reached a mature phase.
• Goldman Sachs and JP Morgan Chase shutter robos.
• Schwab closing down institutional, white label robo service.
• Robo 3.0, providing portfolio options and customization.
• Robinhood acquires Pluto, AI financial planner.

Robos Reaching Maturity

As robo advisor have crested $1 trillion in assets under management the industry has reached a mature phase. When robo advisors first came to prominence many believed it would revolutionize the financial advice industry. Many thought it would create significant pressure on and take market share from traditional advisors. Others saw what they believed was an industry ripe for disruption and the disrupters having finally arrived. While predictions for the downfall of traditional advice have fallen short, robo advisors are making a permanent mark on the industry, just not in the way that many anticipated.

Robo advisors have not taken a significant market share from traditional advisors. Instead, they tend to be most attractive to do-it-yourself investors. Those investors who are comfortable making their own financial decisions and are willing to be active participants in building their own financial plans. This is part of the reason why Schwab and Vanguard have been so successful with their robo advice product offerings and quickly became market leaders while other firms have struggled to find a footing.  Vanguard and Schwab were already successful with self-directed investors and had large existing client pools in which they could introduce their low-cost advice offerings. Many other firms, start-ups, and established players alike have struggled to find their footing in acquiring large swathes of customers.

While robo advisors may not have up-ended traditional advice, they have democratized advice, making professionally managed accounts available to the masses. Having any type of financial advisor for those with just a few thousand dollars to invest was out of reach for most prior to Wealthfront and Betterment launching their products. Now, there is a plethora of low-cost options available for investors at any wealth level.  Many investors are now starting financial advice relationships much earlier in the client life-cycle and at much lower levels of wealth. So, while robo advisors may not have disrupted traditional advice at the scale they had hoped, they have provided millions of investors with a quality, low-cost solution for professionally managed accounts and financial plans.

Now that the industry has reached maturity what will be the next phase of innovation? What will Robo 3.0 look like? Artificial, intelligence being leveraged for more personalized advice is one possibility, but will face high regulatory hurdles. One area we continue to see innovation is the ability to customize accounts or a wider variety of portfolio options.

Firms Continue to Exit

Departing from the days of regular new entrants into the market, today, products that have not reached scale are being shut down. From 2015 through 2020, large financial institutions and ambitious entrepreneurs followed the lead of pioneers Betterment and Wealthfront and launched a plethora of robo-advice products and new features within those products. Today, the pace of new product introductions and innovation has slowed, and the industry's evolution has led to the exit of several firms. As the initial growth phase has ended, companies that couldn't keep up or for whom it didn't make strategic sense have exited the space.

Two notable examples are JPMorgan Chase and Goldman Sachs. Both financial giants tried to capture the burgeoning robo-advice market but faced significant challenges. Goldman Sachs, which never had a strong foothold in the retail brokerage segment, struggled to gain traction, selling its Marcus Invest accounts to Betterment earlier this year. Citing the product's inability to scale and reach profitability, JP Morgan decided to shut down its digital-only robo-advice product late last year. The firm still offers a hybrid advice model with a $25,000 minimum. Goldman Sachs and JP Morgan Chase are the most recent to shutter products. They are following suit of quite a few others in the space.  Blackrock closed the direct-to-consumer offering of FutureAdvisor in 2023 after acquiring the company in 2015. Blooom, John Hancock's Twine, Pacific Life's Swell, and Northwestern Mutual's Learnvest are all examples of products that have closed as the industry has matured and consolidated.

Additionally, we have learned that Schwab plans to shut down its institutional, white label, robo service. The direct-to-consumer Intelligent Portfolio and Intelligent Portfolios Premium services will remain unaffected. Schwab’s white-label product, where RIAs could sign up and quickly bring to market a robo-advice service built on the Institutional Intelligent Portfolios platform will be shut down. Institutional Intelligent Portfolios may have had difficulty finding advisors who wanted to enter the robo advice market. Smaller robo-advice products face the challenge of reaching scale, and RIAs looking to launch their own robo would need to find how a robo advice product would fit along side their existing offering in terms of service level and price.

Shifting Focus from Growth to Profitability

Scale and profitability have been a struggle for many in the space. Betterment, under the leadership of Sarah Levy has been making moves to increase revenue at the firm. First, Betterment introduced a flat $4 a month fee for clients with less than $20,000 on the platform and did not meet minimum monthly deposit requirements. More recently, Betterment hiked the fee for its premium tier from 0.40% to 0.65% annually. Many speculate Betterment may be eying an IPO and raising revenues and profits may be part of the preparation for a possible public offering.  Wealthfront, on the other hand, has both stuck to its guns as a digital platform, deciding not to introduce a live-advisor focused service tier and has not raised prices. Wealthfront also claims that it is achieving healthy profits.

Robo 3.0: More Portfolio Options and Customization

Robos are trying to find what is next to improve their products.  One area where we continue to see product enhancements is customization and choices in thematic portfolios.  SRI, ESG, or Impact portfolios are now an option at many robos. This year, both Betterment and Wealthfront launched new bond portfolio options. Betterment announced in July a new short-term 'Tax Smart Bond Portfolio' through their partnership with Goldman Sachs, promising better after-tax returns than traditional high-yield savings accounts.  Meanwhile, Wealthfront launched an 'Automated Bond Ladder' product, which will construct a ladder of treasury securities for a client with as little as $500.  Schwab, years ago, started giving clients the option to opt for a 'Domestic Focus' portfolio, which is a portfolio with less exposure to international securities than its standard portfolio.

Both Wealthfront and Betterment clients can customize their portfolios, allowing them to express individual views on asset classes or industries by introducing funds and adjusting target weights within their portfolios. SoFi, earlier this year, announced offering alternative investments to its clients. Although alternatives are only available through the self-directed offering, this move will help bring new asset classes and strategies to retail investors.

The future of robo-advisory is likely to see an increased emphasis on personalization and flexibility, driven by technological advancements and a deeper understanding of investor preferences. Robo 3.0 will offer more strategies, thematic portfolios, portfolio customization and will hand back some control over portfolio direction to the clients, if they want it. Robos will need to strike a balance between providing portfolio options, while not overwhelming clients with too many options.

Artificial Intelligence and Advice

As product managers look to what is next, inevitably, a prominent question is whether artificial intelligence and large language models can be leveraged to create a new client experience. Like digital investment advisors, artificial intelligence will prove to be a challenge for both product managers and regulators alike. The reliability of large language models presents a challenge to those who deliver financial advice, as delivering bad advice to just one client can have a significant impact on that client and can violate an advisor's fiduciary duty. This will make the implementation of AI as financial advisors a challenge.

Robinhood's recent acquisition of Pluto, an AI-driven financial planning company, brings these regulatory questions to the forefront. With Pluto's capabilities, Robinhood increases the level of financial tools that it offers. However, it seems likely that Robinhood will aim to remain on the side of providing tools rather than full-fledged advice to avoid increased regulation and fiduciary duties.

While Robinhood is not an investment advisor, its tools may give the impression of offering investment advice. For example, currently, Robinhood offers recommended portfolios that provide first-time users with an asset allocation snapshot but do not manage the portfolio over time.  Walking through the recommended portfolio module is strikingly similar to the onboarding phase of opening a new account at a robo advisor.

This distinction could become even more blurred if the integration of Pluto's capabilities provides investment insights and suggestions. Both Robinhood and Pluto are positioned as tools for self-directed investors, providing generalized investment suggestions based on limited user inputs rather than detailed, personalized advice. Although, Robinhood representatives have discussed the possibility of registering as an investment advisor. Navigating these distinctions will be key for compliance with evolving regulatory frameworks, especially as AI capabilities expand and regulatory considerations become more complex.

The integration of AI into robo-advisory services presents both opportunities and challenges. While innovation in some areas may slow, AI has the potential to drive growth and enhance accessibility in financial advice. Companies must navigate a complex regulatory landscape, balancing the benefits of advanced AI tools with the need to comply with evolving guidelines and meet the standards required of fiduciaries.

Whether AI can and will be implemented in robo products or the next stage of innovation will center around optionality in portfolio offerings we are excited to see what is next in the industry.  Robo advice has established itself as permanent fixture of the advice landscape. We hope to see industry leaders continue to expand access to financial advice and bring new innovative products and features to market.