Your IndustryAug 10 2015

US ‘robo-advice’ assets to top £1,200bn

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
US ‘robo-advice’ assets to top £1,200bn

Around $2,000bn (£1,200bn) will be managed under ‘robo-advisers’ in the US by 2020, according to one consultancy firm, with major financial institutions blazing the AI adviser trail on the other side of the pond.

The prediction came from consulting firm AT Kearney’s May study into the area of artificial intelligence and algorithms being used in so-called ‘robo-advice’ systems, which polled a nationally representative sample of more than 4,000 US adults.

It found that 20 per cent of consumers already reported being aware of robo-advisery services, with 48 per cent having some level of interest in using them (ranging some somewhat to extremely interested) and 69 per cent being likely to use robo services investable assets (somewhat likely to extremely likely).

Analysis of the market suggested that robo-advisers will become mainstream over the next three to five years, with adoption moving from 0.5 per cent of total investable assets in 2015 to 5.6 per cent across the US in 2020.

Perhaps unsuprisingly, early adopters are likely to be younger - 50 per cent under 35 years old - and risk-taking investors - 20 per cent self-described as risk takers - according to the consultant, while likely adopters were profiled as being older - 45 per cent over the age of 55 - and non-risk takers - 70 per cent cautious or risk adverse investors.

Bob Hedges, a partner in the financial institutions practice at AT Kearney, told FTAdviser that in the last few years consumers have become increasingly comfortable doing financial transactions online and on mobile.

“Now choosing risk, rebalancing and investment portfolios can all be done online and without traditional advice, so at a fraction of the cost paid for a managed portfolio service.

“Leadership is coming from the likes of Charles Schwab and Vanguard, while Bank of America Merrill Lynch is also rumoured to be developing something in this space.”

Investment firm Charles Schwab launched its fully-automated investment advisory service Intelligent Portfolios in March this year, using algorithms to build, monitor and rebalance diversified portfolios based on an investor’s stated goals, time horizon and risk tolerance - without charging any adviser fees, commissions or account services fees.

Investors with as little as $5,000 (£3,200) receive a portfolio recommendation after answering a short set of questions that quickly assess their goals and risk tolerance.

A version for independent advisers who custody their client assets with Schwab was made available in June, with executive vice president Naureen Hassan stating: “There’s a lot of interest among advisors for automated investment management solutions”.

A Schwab spokeswoman told FTAdviser: “Advisors have told us that automated investing can help them reach broader market segments, including younger, next-generation investors, while helping them more efficiently scale their businesses.

“We know of firms who believe that this platform will help them efficiently serve clients with assets below current firm minimums, and children of current clients.”

In the first six weeks, Schwab’s service had $1.5bn (£963m) in assets, and according to results published this month, Intelligent Portfolios had $3bn (£1.92bn) at the end of the second quarter with 39,000 accounts.

At the start of May, Vanguard launched its Personal Advisor Services, a hybrid proposition which combines an ongoing adviser relationship with an online investment modeling technology, all for an annual cost of 0.30 per cent.

A spokeswoman for the firm said that it comes in response to demand from clients asking for advice, but with less than the $500,000 (£320,000) lower limit the firm previously imposed. The new service is available to individual investors with $50,000 (£32,000) or more available for a managed portfolio.

Through the end of June, the service had more than $21bn (£13.4bn) in assets under management - $11bn (£7bn) is new assets in addition to assets transitioned from their legacy advice service.

As for the independents, Wealthfront had $2bn (£1.28bn) in assets this February, while following not far behind them were Betterment with $1.4bn (£896m).

AT Kearney’s report noted that “aspiring disruptors” will find a significant opportunity in robo-advisory, especially traditional brokers seeking to transform their service/business models.

Mr Hedges added: “There is potential for a non-financial services provider to get involved as well, if the likes of Amazon or Google decided to get involved, they could conceivably drop the price point, increase ease of access, market themselves heavily and be highly disruptive for traditional players.”

It has not all been plain sailing on that side of the Atlantic though, as at the start of May the Securities and Exchange Commission and the Financial Industry Regulatory Authority issued a joint alert for investors on automated investment tools.

The regulators warned that an automated tool may rely on assumptions that could be incorrect or do not apply to an individuals’ situation.

Recently, the UK government and regulators launched a review to examine how to plug the advice gap, with robo-advisers being one of several areas under the spotlight.

FTAdviser has previously reported on the adoption of US-style algorithm advice tools in the UK, with experts noting that regulators in both countries have “know your customer” and suitability requirements, although these are interpreted less stringently in the US.

peter.walker@ft.com