The Robo-Advisor Arms Race

Can upstart robo-advisors compete against scale?

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

It was going to happen sooner or later.

When they launched roughly five years ago, tech-driven companies such as Betterment or Wealthfront had the audacious and laudable goal of taking on the incumbents of the gargantuan wealth management industry. Many traditional wealth managers were skeptical of portfolios being driven by artificial intelligence, and adopted a “wait and see” approach. If it became clear that the machines were indeed taking over the wealth management industry, they could then find some way to reverse-engineer their way into the market, using their scale and connections to make up ground.

As the upstarts won new accounts and proved out the robo-advisor business model, the incumbents that dominate the traditional finance scene leaped into action. In 2015, behemoths like Vanguard and Charles Schwab, which each manage trillions of dollars of assets, fought back by introducing their own robo-advisor products. Meanwhile, Blackrock made an acquisition of an existing platform (FutureAdvisor) to enter the market, and just months ago mutual fund giant Fidelity launched its own robo-product called Fidelity Go.

The scale of these companies meant that domination would become inevitable. Vanguard, for example, took its Personal Advisor Services platform from $0 in assets under management (AUM) last year to $41 billion today. By our math, that’s more than all other major U.S. robo-advisors combined.

Charles Schwab, which has 9.3 million existing customers for its discount brokerage services, had no problem bringing customers over to its new platform. It also has $10 billion in AUM already in just a year, which is more than Betterment and Wealthfront combined.

Spokespeople for the independent robo-advisors will tell you that they are building products for millennials, with an eye on a bigger prize. As wealth is transferred to the millennial generation over the coming years, they will be in position to take advantage of this as the brands that millennials trust. We are certain that these startups can evolve into great companies with this mission, but we also wonder if they ultimately left money on the table.

Were they not aggressive enough? Could they have partnered with a bigger institution to roll out their product faster? Could they have gotten a bigger piece of the pie?

It’s hard to say, but the robo-advisor space continues to be an interesting one to watch. It also teaches us an interesting lesson about trying to compete with mega-sized companies, which have scale, expertise, and resources at their disposal.