The US robo-advice industry has sustained good health through the coronavirus emergency following a blockbuster 2019, a just-released research report shows.
In line with other direct-to-consumer investing platforms, the top US robo-advice providers thrived as the pandemic rolled on, according to the Backend Benchmarking study.
“While the COVID-19 crisis sparked a period of historic market volatility, digital advice providers appear to be faring well in the crisis,” the report says. “They may even be seeing net benefits. Reports claim that new client sign-ups and activity held strong and, in many cases, increased during the months when markets were the most volatile this year.”
Robo-advisers could have been a calming influence during the March market panic, blunting behavioural biases that historically have seen retail investors sell-low and buy-high, the study says.
“We are seeing some early evidence that robo clients are bucking the trend of panic selling and are instead remaining invested as the market recovers,” the Backend Benchmarking report says.
But if the qualitative power of digitally dispensed advice remains moot, its quantitative engine continues to hum.
The June quarter Backend survey, which also includes the specialist researcher’s fifth ‘Robo rankings’, estimates the world-leading US digital advice market grew to more than US$630 billion by the end of last year.
“Of this $631 billion, $247 billion is invested with incumbent financial institutions, $50 billion with independent robos, and $334 billion with robo retirement providers,” the study says.
“… In 2019, we estimate the top five robo advice providers grew their [assets under management] AUM by 38%, on average.”
Robo-advisers still represent only a small share of the US$50 trillion plus US managed funds industry but, at about 10-times the size of KiwiSaver, the market has achieved impressive scale in NZ terms at least.
And the US digital advice business is already showing signs of maturity despite measuring its life-span in little over one decade.
“After an explosion of products and offerings in the past five years, the field of robo advice products is now slimming as the industry matures and consolidates,” the Backend report says.
In addition to a number of smaller independent robots heading to the scrap-yard, incumbent investment firms have been hoovering up successful innovators. Most recently, US retirement giant Empower paid about $1 billion to acquire stand-alone robo Personal Capital.
Empower splashed out a “significant premium” above the typical valuation for a human-based advice firm, Backend says.
“Personal Capital has $12 billion in AUM and some of the best online planning and outside account aggregation tools in the market, which they make available for free to both clients and non-clients alike,” the study says. About 2.5 million clients use the Personal Capital system.
At the same time, the report says “TD Ameritrade and E*Trade are also in the process of being acquired by Schwab and Morgan Stanley, respectively”. Goldman Sachs, until now a high net-worth hold-out, dabbled with the lower classes with its buy-out of advisory firm United Capital last year and robo-advice pioneer, Folio, this May.
Ultimately, the big brand financial giants could banish smaller robo-players to the margins.
“While many independents struggle to survive, the incumbent firms have adopted robo technology into their line-ups to attract more clients,” the report says. “Firms like Schwab, Vanguard, and Merrill Lynch have already expanded their financial advice product suite and have been accumulating new clients with lower minimums. These are clients that have historically been left out of traditional advice relationships. Large financial firms are adopting robo advice to expand the types of clients they serve, not necessarily to compete with existing traditional advisors.”
Indeed, Vanguard is the unchallenged leader in the US robo-space with US$127 billion in AUM across its digital advice services – or about a quarter of the total market. Schwab, the closest competitor to Vanguard, claimed roughly US$46 billion of robo-assets at the end of last year, according to Backend.
Independent digital advice firms, however, are trying to expand by offering other financial services such as banking, the study says.
The Backend analysis also shows the US robo-advice industry collectively underperformed investment benchmarks in the first six months of 2020. Traditionally seen as a proxy for index investing (and exchange-traded funds in particular), the average US robo-advised equities portfolio was down almost 8 per cent in the year-to-date, the report says.
“While the average robo underperformed the S&P 500, the S&P 500 is a large-cap index, and large-caps were one of the strongest performing areas of the market during this period,” Backend says. “Robos hold diversified assets and typically have exposure to international equities as well as mid- and small-cap.”
The report also notes that robo-driven socially responsible investing (SRI) portfolios outperformed but at much higher costs and with some concerns over labeling.
“… the minimal improvements in ESG scores between SRI and non-SRI portfolios is disconcerting for investors,” the study says. “Despite how firms market these portfolios, investors should not blindly assume that they are making a significant positive impact by joining the sustainable investing trend.”
Backend says the US robo-advisers are also experimenting with flat-fee structures, fractional shares and ‘direct indexing’ (where investors directly hold the underlying securities at benchmark weightings rather than via fund structures).
Founded in 2017, the robo-advice research specialist Backend is headed by Ken Schapiro.