Given the amount of hype robo-advisors have generated lately, and how quickly they’ve grown their assets under management, one would think that the sky’s the limit for these providers of automated investment advice. Cost-conscious and tech-savvy investors with their preference for passive investment strategies will continue to drive market momentum for robo-advisors.
Growth predictions from industry analysts confirm this view. New research from Cerulli Associates cited in a recent InvestmentNews article estimates that robo-advice platforms will grow to an astounding $489 billion in AUM by 2020. That’s a huge leap from the roughly $18.7 billion they manage today.
Other market research firms predict even higher growth numbers for the robo market. One example is the Tiburon Research Group, which estimates that the online advice market will grow to more than $655 billion by 2019.
Coming Back Down to Earth
As reported in WealthManagement.com, however, Tiburon actually expects the robo-advisor market to shake out in 2016 and beyond. Tiburon analysts believe that the number of robo-advisor firms will peak at 22 companies this year, but then shrink to just 10 companies by 2019. Reasons for this anticipated decline include market consolidation and the likelihood that some robos will run out of funding before reaching profitability.
There’s also a big asterisk in the analysts’ growth predictions for the online advice market. That qualifier is that a large amount of the expected growth won’t come from ‘pure-play’ robos with direct-to-consumer models like Wealthfront and Betterment. Instead, according to Tiburon, most of the growth will come from large, well-established firms that focus more on the defined contribution/retirement space than on ETFs. This includes companies such as Financial Engines, which has been around since 1998, and with over $114 billion in AUM is presently the top online advice provider.
Hybrid Models Growing in Popularity
Despite all the dramatic headlines and heated debates about robots pitted against human advisors, there is a sensible middle ground emerging in the form of hybrid delivery models. These part-robo, part-human approaches strive to give investors the best of both worlds. That is, investors can opt for self-direction and algorithm-driven functions for their routine investment activities, but are also able to interact with a human advisor when they feel it’s necessary.
Industry giants Charles Schwab and Vanguard both committed to the hybrid model in 2015 with their respective Intelligent Portfolios and Personal Advisors Services. Financial Engines also embraced the hybrid delivery model with its recent acquisition of The Mutual Fund Store. The deal provides Financial Engines investors with the option of meeting with a dedicated advisor at one of The Mutual Fund Store’s 125 locations nationwide.
Going forward, the trend in the robo-advisor market toward a middle ground, hybrid delivery model likely won’t generate nearly as many dramatic headlines or flashpoints of disagreement across the wealth management industry. While this may be bad for reporters and industry pundits, it’s a positive development for investors and the industry as a whole.
