Analysts at asset manager Bernstein are bullish on the prospects of so-called robo advisors — digital wealth managers that offer investment strategies on the cheap.
In a note sent to clients on Monday, analyst Inigo Fraser-Jenkins and his team wrote: “We think there is a strong case to be made that assets run by such strategies will increase significantly. They are easy to use, transparent and the robo label will probably act as a good marketing tool.”
Bernstein predicts that established players such as BlackRock or Fidelity could come to dominate the market and may even face competition from tech giants like Google or Facebook.
“Robo advisors” are one of the hottest areas of financial technology — fintech — in 2016. Broadly, they are online investment platforms that “match a stated risk tolerance of investors with an asset allocation based on asset class returns, variances, and covariances,” Bernstein writes.
You take a quiz online that puts you in one of several risk buckets. Your money is then invested based on pre-determined allocation for your risk band. If the performance starts to go off track, many “robo advisors” will then also automatically adjust investments to try and recover it.
Examples of leading “robo advisors” are Wealthfront and Betterment in the US and Nutmeg, MoneyFarm, and Wealthify in the UK. Bernstein based its conclusions on the popularity of “robo advisors” by opening accounts with Nutmeg and MoneyFarm.
“They seem pretty good!” Bernstein reports. “The accounts are easy to open, and the link from risk preferences to asset allocation is fairly intuitive. We think lots of investors are going to do this.”
Berinstein’s note is titled: “Robo advisors’ threat to fund managers – R2-D2 or Terminator?,” and the bank concludes: “As they currently stand, they are more R2-D2 given they currently account for only a very small portion of invested assets.”
The largest “robo advisors” in the US had total assets under management of $60 billion in September 2016, Bernstein says. For comparison, BlackRock, the world’s biggest asset manager, has $5.1 trillion under management.
While Fraser-Jenkins and his team don’t think “robos” pose a threat to traditional asset managers at the moment, if the “robo advice” market grows at the rate that Bernstein expects “robo” players could end up with a significant proportion of retail money and: “At that point they may come to resemble something more akin to Terminator,” for active fund managers, who charge a higher fee for personally picking stocks, bonds, and other assets they think will outperform the wider market.
Bernstein adds: “Whether the current cohort of robo advisers will be the ones that ultimately benefit or whether larger platforms take over the area remains to be seen.”
The analyst points to the launch of “robo advisors” by established players such as Deutsche Bank and UBS, as well as acquisitions by players such as BlackRock and Invesco. (Allianz recently took a stake in MoneyFarm, another example of collaboration.)
Bernstein says: “The issue here is we believe that barriers to entry of the actual robo part of the asset allocation process are very low, the hard part is getting the clients.” Those market dynamics would seem to favour a “robo advisor” launched or backed by an established player.
Fraser-Jenkins says such an established player may not even come from the finance sector. He writes:
“Tech companies are another possibility in theory. Both Google and Facebook have in the past commissioned studies on potential entry into the asset management industry. Meanwhile Alibaba, Tencent and Baidu are already successfully distributing money market funds to Chinese retail investors. Tech companies could capitalize on the high trust that customers have in their brands and their expertise in sophisticated algorithms.
“The fear of tech companies entering asset management has often been brought up in client meetings. Such a move (so far it has only happened on any meaningful scale in China) would likely be very disruptive indeed. Having said that, there are reasons why such companies might not want to get involved at this stage to do with reputation and falling margins in the industry. If they did choose to get involved then presumably robo would be a natural entry point.”
Bernstein says the rise of “robo advisors” is part of the “Uberisation” of finance, although the wealth manager says “robo advisors” themselves are not particularly technologically sophisticated.
“Their name may imply some new technological break-through, but far from it,” says Bernstein. “Their growth owes more to regulation in creating an “advice gap” in some markets and a focus on lower and more transparent fees.”