Robo-advisors have been all over the news this week. Two of the bigger players in the space Betterment and Learnvest both announced they had raised large chunks of additional venture capital. I had a post up this week talking about how the rise of these services could disrupt traditional providers.
Even as venture capital floods into this space there are doubts that these firms will ever be able to garner enough assets quickly enough to create self-sustaining business models that will provide for a profitable exit for outside investors. There is no shortage of potential competitors that could in a certain sense, disrupt the disrupters.
For example, there was much discussion this week that fund giant Vanguard was expanding their offerings in managed portfolios. Vanguard already known for their low costs could with its already existing client relationships and marketing prowess could become a viable competitor.
Nor should we ignore the possibility that other incumbent managers could enter this space in large part to defend their existing businesses. Meb Faber recently tweeted:
Challenge many roboadvisors will face is vertical integration – when an ETF advisor wants to do 0% fees, how can they compete?
— Meb Faber (@MebFaber) April 17, 2014
Michael Kitces has written a great deal about the robo-advisor trend and in a recent post tried to measure how much these new players would have to scale to become profitable. This is a worry that is echoed by others in the industry. This argument has some validity but it does not offset the reality of steadily declining costs. Kitces writes:
Ultimately, I do think we’ll look back at this 2009-2014 era as the one where the core construction and implementation of a passive, strategic portfolio became commoditized by technology for an ultra-low cost, in a transitional moment as seminal as what Vanguard’s first launch of the index fund has been slowly and steadily doing to the world of stockpicking and mutual fund managers for the past 40 years. In truth, this trend towards lower cost portfolio implementation is not new – it dates back to the de-regulation of trading commissions on Wall Street, which brought on the rise of the discount broker in the 1980s and 1990s, the rise of online discount broker in the 2000s, and now the rise of the online portfolio construction solution in the 2010s. It will lead to a few winners, and some traditional players that will be losers.
In a certain sense investors need all the help that they can get at this point. Despite the evidence that it is a great time to be an individual investor there are macro headwinds facing investors. Matthew Klein notes that while a growing percentage of society has come to rely on capital income the available returns have been shrinking over time. When you add on top of that the prospect of an ever decreasing equity risk premium you see the need for investors to safely maximize returns from their portfolios.
For most investors two of the easiest ways to do that is lowering their costs and better managing their taxes. These are two things that the robo-advisors are capable of doing well. There are a number of other ways in which human advisors can help investors better manage their financial lives but it hard to see how the trend toward lower cost, automated investment management goes away any time soon.