Cerulli Associates predicts that the digital investment advice market - including all flavors of the so-called "robo advisors" - will grow to $489.1 billion in assets under management by 2020, up from the current $18.7 billion.
“The compelling value proposition of digital advice providers ... who offer low-minimum, low-cost portfolios, coupled with consumers’ expanding interest in passive investing will fuel this growth,” says Tom O’Shea, associate director at Cerulli.
Cerulli’s research looked at the full range of digital advice platforms in the market today, including any firms that rely primarily on algorithms to construct asset allocations, mostly use passively managed ETFs and funds, have tax optimization functions, and low or no-balance account minimums.
That includes companies like Wealthfront and AssetBuilder, which operate largely without human interaction, to firms like Personal Capital, where investors interact primarily with the investment portal, but do have access to a human advisor. The digital advice providers included firms like Schwab’s Intelligent Portfolio, Vanguard, TradeKing, Betterment, FutureAdvisor, Rebalance IRA and Hedgeable.
O’Shea says there are very few pure robot firms out there. “The term robo advice is a myth. There’s only a couple of firms that make it very difficult for you to get in touch with a human being,” O’Shea says, noting that firms like Betterment and Hedgeable have chat functions while firms like FutureAdvisor and Rebalance IRA offer consumers the option to have phone conversations around their investments.
“Digital advice exists across a spectrum and any advisory firm could incorporate some component of it into their business,” he says.
But will the digital advice market overtake the direct retail channel? Direct investment firms like Scottrade, eTrade, Fidelity, Merrill Edge and Wells Trade has about $5.1 trillion in assets, Cerulli says, growing 11.8 percent alone last year, and should reach $7 trillion in assets by 2020. That’s faster than any other channel of distribution in the financial services industry, and is surpassed in size only by the wirehouse brokerages.
Retail direct firms, like Schwab and Vanguard, are well-placed to incorporate digital advice into their models, as they are doing, because of their size and scale, O’Shea says.
“We anticipate that most, if not all, retail direct firms will have a digital advice offering within the next three years, and traditional advisors will also launch digital offerings for lower-balance investor accounts,” O’Shea says.
Cerulli estimates the total market for digital advice providers is $7.8 trillion, assuming firms were able to capture every household that expressed interest in the service.
“Folks have said the digital advice space is a multi-trillion dollar opportunity, but that’s encompassing everything, every opportunity. And no one can get the total market,” O’Shea says.