Financial Enginesrsquo CEO Lawrence M Raffone

Financial Engines’ CEO Lawrence M. Raffone

Online Advice Providers Still Dominated by Financial Engines

In its latest research, Tiburon Strategic Advisors looked to make sense of the growing online advice market that now consists of more than 50 companies managing $250 billion in assets.

Tiburon managing partner Chip Roame said that while many are tempted to label every company in this space as “robo advisor,” Tiburon uses the term solely for the venture capital-backed technology start-ups selling directly to consumers. Though these companies tend to attract a great deal of digital ink and capital investment, the reality is that they are still a small piece of the larger online advice pie.

The real money, Roame said, is in the defined contribution space. While there are only eight or so companies targeting DC plans, they dominate the overall assets in the online advice market.

“The leading [online advice] firm by any measure would be Financial Engines,” Roame said, adding that the digital 401(k) manager controls nearly half of the entire market. “They’re the leaders in assets, accounts, clients — everything.”

As for the direct-to-consumer online advisors, they only account for $50 billion of assets. Tiburon segments these companies into two groups: services launched by established discount brokerages and mutual fund companies, and venture capital-backed technology start-ups known as robo advisors.

The established companies continue to dominate, with Vanguard Personal Advisor Services’ $31 billion AUM leading the way. Schwab comes in second with $6.5 billion.

Betterment leads the robos with $4.5 billion AUM, but collectively robos only manage a total of $10 billion — a third of the assets that Vanguard alone has attracted.

“Some [robo advisors] are leading growth among RIAs, but they don’t stack up in size relative to the Vanguards or relative to the Financial Engines,” Roame said.

That hasn’t slowed down the industry’s fascination with robos, and as venture capital and press coverage continues to pour in, the number of robo advisor companies continues to increase. Tiburon now counts 29 venture-backed tech start-ups, but even this number is likely low.

“I pick up industry journals and read about new firms all the time,” Roame said.

Tiburon expects online advice to continue to grow over the next few years, reaching $650 billion in assets. The firms targeting the DC space will continue to do well as automated solutions inside retirement plans becomes more widely known and accepted. Tiburon believes these firms can attract as much as $400 billion in assets over the next few years. They also believe the established firms will continue to dominate the direct-to-consumer market as they can increase their marketing budgets to attract more of their existing clients to use the services.

Tiburon expects some of the robo advisors will make it, while others will get acquired for large amounts of money (such as BlackRock’s $152 million purchase of FutureAdvisor), and the rest will simply fold. In any event, Roame said the number of robo advisors will soon begin a steady decline, and that the venture capital dollars can, in this case, be a good indicator of which ones will survive.

“If I’m a betting man, I think Betterment will make it.” 

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