Will Robo advisors take control of the ETF market?

Will Robo advisors take control of the ETF market?

Will Robo advisors take control of the ETF market? 800 533 Efi Pylarinou

Will Robo advisors take control of the ETF market?

Betterment and Wealthfront are 11 and 8 years old. They set the tone in the market for Robo-Advisors, that are neither Robots nor Advisors as Paolo Sironi kept saying more than 4 yrs ago. They got leapfrogged by the incumbents which as of today manage 10 times more assets through their various digital wealth offerings.

Autonomous Next Research [1] shows a ratio of $550 over $50, Incumbents over Fintech Standalones as of the end of 2018.

EFT Market

The tug-a-war between no-human advice (which was the original purists’ approach), hybrid (some human advice and or someone to call); has tilted towards the hybrid advisory model.

The tug-a-war of flat fees versus % of AUM; remains tilted towards the % of AUM which was the conventional one. Flat fee advisory have been offered by XY planning network and directly to the consumer only recently by Charles Schwab (see No Trade-offs: Give customers everything they want as cheaply as possible).

Back in 2016, just after Vanguard stepped into the market with their Personal Advisor services, most well-known institutions [2] were predicting between $ 2.2 trillion and $ 3.7 trillion in assets to be managed by Robo-Advisory services in 2020 and $16 trillion by 2025.

Well, 2020 is around the corner and we have not reached $1 trillion yet.

The customer remains king. They can get digital-only service for as low as 15bps (once Vanguard Digital is live) or for $30 per month a hybrid service from Schwab.

The ETF market, which is the main product universe that powers all digital offerings, has been growing and has reached $4.7 trillion. Digital wealth seems to be managing 12% of ETF assets (as of end 2018).

EFT Market

It took the ETF industry a decade to reach $1 trillion in assets (in 2010). But the pace of growth picked up significantly thereafter and averaged close to 20% per annum. Will this pace hold, if equity markets enter a bear trend?

Can digital wealth maintain or improve its 12% share of the ETF market?

The growth in their AUM only started to be meaningful from 2016 once Schwab and Vanguard stepped in. Edleman`s 2018 deal to buy Financial Engines, was another significant contribution to Digital wealth growth managed by robos.

Aite group`s research in 2018 predicted $1.46 trillion for 2021 and BI intelligence $4.6 trillion for 2022. [3] Aite`s numbers mean that Digital AUM needs to grow at a rate of 38% per annum from 2019–2021 to reach the $1.46 trillion by the end of 2021. If this materializes and the ETF market continues to grow by 20% (reaching $8.1 trillion), then Digital Wealth will be managing 18% of the entire ETF market.

In the more aggressive scenario suggested by BI intelligence, the implied growth rate for Digital AUM from 2019–2022, is 70% per annum from 2019–2022. If this materializes and the ETF market continues to grow by 20% (reaching $9.5 trillion), then Digital Wealth will be managing 48% of the entire ETF market.

EFT Market

[1] Infographic from Roboinvesting event in London, Lex Sokolin`s keynote. Other research groups don`t take into account Edelman and Merill Edge and therefore arrive at a lower number. Investopedia (Robo-Advisors 2019: Still Waiting for the Revolution) reports that as of mid 2019, $440 billion is managed by robo-advisory services according to Backend Benchmarking, and a $350 billion range is Aite Group`s numbers.

[2] https://www2.deloitte.com/content/dam/Deloitte/de/Documents/financial-services/Deloitte-Robo-safe.pdf

[3] https://www.financial-planning.com/news/3b-edelman-financial-engines-deal-puts-rias-in-hot-seat

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