With the advent of Automated Digital Wealth Management solutions (aka robo advisors), the traditional wealth management industry is facing perhaps its most disruptive threat since low-cost online stock trading emerged in the mid 1990’s

The combination of highly credible digital wealth management solutions, the Millennial generation’s predisposition to “do-it-yourself-through-an-app” and the pending transfer of trillions of dollars of wealth to and eventually from Baby Boomers is forcing participants across the wealth management industry to reevaluate their product and distribution strategies

Already suffering from the relative shift in appetite towards ETFs and other passive investment vehicles, the mutual fund industry in particular appears further threatened by digital wealth management solutions since most of the solution providers utilize ETFs as their underlying investment vehicles; this movement may force firms that have traditionally only focused on providing financial services products to focus on providing scalable advice as well – the new Department of Labor rules around fiduciary duty for retirement service provides will likely exacerbate this trend

At a minimum, all wealth managers should be highly focused on “digitizing” their businesses as consumers of all ages and demographics will increasingly expect an “Amazon and Uber-like” experience from all of their financial service providers

Similar to the online trading playbook, new consumer brands are emerging in the digital wealth management industry (such as Betterment, Wealthfront and Personal Capital) while traditional firms are striking back by either offering their own in-house solutions (such as Charles Schwab and Vanguard) or partnering or acquiring to speed time to market

Recent M&A includes BlackRock’s acquisition of FutureAdvisor, Invesco’s acquisition of Jemstep and Northwestern Mutual’s acquisition of LearnVest

A handful of different business models have materialized in the digital wealth management space including 1) new direct-to-consumer brands with limited advisor assistance, 2) new direct-to-consumer brands with heavier advisor assistance, 3) traditional firms with in-house digital wealth management solutions, 4) business-to-business and white label providers enabling others to offer their own digital wealth management solutions and 5) retirement specific providers including both direct-to-consumer and business-to business providers

Similar to other recent FinTech innovations, digital wealth solution providers are quickly emerging around the globe – in fact, we have identified more international direct-to-consumer players than in the U.S.

As capital continues to flow into the digital wealth management space and traditional investment management firms evaluate their strategies, we expect to see a notable increase in partnership and M&A activity in the space
over the next 12-18 months

A number of newer firms are likely to be acquired by larger organizations that are looking to add or deepen their digital wealth management capabilities while only a relatively small number of new consumer brands are likely to achieve the level of scale (and funding) they need to survive on their own over the long-term.

Eoin Treacy's view

Here is a link to the full report.

The risk of litigation for financial advisors means the majority of investors are presented with what might be described as a plain vanilla 60/40 bonds to equities blend for their portfolios. Depending on whether the investor is categorised as conservative or risk tolerant that basic formula might be altered somewhat but the long-term nature of the strategy means the majority of clients will be invested in the model portfolio. 

I saw this first hand when I was at Bloomberg in the early 2000s. My accounts were large private banks in Luxembourg and the most common business model was to have one strategist who created the investment policy and a large number of rank and file client advisors who dealt with customer queries. The risk in this strategy is that if the strategist does not identify a risk ahead of time, the drawdown is experienced by all clients invested in the model portfolio. 

The challenge for robo-advisors is only likely to be magnified because the portfolios are so much larger. The sales patter is likely to address this challenge by saying the computer program uses a sophisticated algorithm to identify risky trading patterns. However if evidence from the market is any guide what they are using is a blend of moving average strategies which it must be stressed lag by definition. 

The evidence from the market is that flash crashes are the result of herding activity among computer programs. It’s not hard to imagine a situation where longer-term oriented robo-advisers become fodder for predatory algorithmic systems which could give rise to larger peak to trough swings than we have seen over the last few years.  

Having an out-of-the-money call strategy in place to take advantage of the occasional bouts of volatility that are now part of the investment landscape would appear to be a worthwhile endeavour.