Wealthfront, the biggest robo-advisor, already manages more than $2 billion, and while this may seem a rather modest amount compared to traditional asset managers, it is growing exponentially; up by 10-fold in the past two years or so. Betterment, another rapidly expanding automated investment management service, is following in hot pursuit.
As with most things in this digital age, the money management industry is relentlessly moving towards automation, and robo-advisory is substantiating itself in the new passive-management world by its drastic rate differentiation. Betterment claims to offer rates of just 0.15%-0.35% compared to a traditional 1.5%, and by compounding these charges, it adds significant value to investments over time.
Nutmeg is one UK company which has fast-adopted the automated wealth management concept with intelligently managed online investment portfolios at the core of its offering, and its highly competitive fees from 0.3% to 1% are certainly causing a stir across the financial services industry.
By combining simple asset allocation formulas with slick user interfaces on the internet to encourage simple and virtually instantaneous investment, it’s a cost-effective enterprise indeed. The simple algorithms probably don’t require much more than one day of coding, and with a significant reduction in labour costs, it’s easy to see how the margins can be attractive to both the companies and their investors.
Taking into account other human influencers, and the real value proposition of robo-advisers is clearly behavioural. Investors are subject to an array of biases, including the temptation to chase returns and to try to time the market. Robo-advisers hope to be able to cancel out these biases.
These automated investment advice services also aim to deal more smartly with tax than some of the investment platforms operated by mutual fund and brokerage companies. Clients who are actively buying and selling investments using the system receive advice on the tax implications of each transaction. They also offers a “tax harvesting” service.
Robo-advisor platforms are commoditizing the core cost to assemble a passive strategic continuously rebalanced portfolio, and may even threaten traditional mutual funds and index ETFs as transaction costs continue to decline. When, and it’s inevitably a ‘when’ rather than an ‘if, this technology becomes mainstream in London it will certainly be interesting to witness the impact it has and to what extent it will disrupt fund management performance. Watch this space.