Robo-advice Boost to ETFs

Exchange traded funds are big business in the US where institutional and retail investors have invested $2.2 trillion of the $3 trillion that is invested in ETFs worldwide.

In the UK ETF investment has predominantly come from the institutions, albeit that Hargreaves Lansdown has recently included passive investments in its Wealth 150 Plus list of favoured funds after the number of its clients using ETFs doubled in five years (see ‘Well on Track: DIY Investors ‘Flock’ to Passive Investments’).

However, despite relatively low levels of awareness and education among retail investors, managers of exchange traded funds believe that the industry is about to be transformed by the proliferation of digital investment managers or robo-advisers.

Most of the new generation of automated advice platforms use ETFs as the building blocks of their investment portfolios and despite the fact that they are tucked away in the engine room, this will revolutionise the way in which institutional investors and retail customers buy ETFs.

According to Stephen Wall of consultancy Aite: ‘Robo-advice offers massive opportunities for ETF providers to increase sales,’

‘it is predicted that US-based robo-advisers will manage more than $2 trillion by 2020’

Robo-advisers currently have very few assets under management, but riding on the current fintech wave of creativity and innovation, the new platforms are expected to have a similar experience as the US where they had little difficulty in attracting institutional and VC investment.

There are currently believed to be around seventy automated advice platforms in development ranging from start-ups to traditional banks and brokers with targets as diverse as millennials, sophisticated investors and next generation financial advisers.

It is predicted that US-based robo-advisers will manage more than $2 trillion by 2020 and that fund managers with no access to robo-advice could lose up to $90 billion a year in revenues if they cut their fees to compete with the new breed of advisers.

Asset managers, banks and brokers are all pondering the threat to their existing business models that robo-advice may pose, but also weighing the opportunity of offering automated advice as part of a suite of investment options.

Two of the biggest asset managers, BlackRock and Vanguard, reacted swiftly to the opportunity and moved into the robo-advice market last year; other banks and asset managers such as Charles Schwab, Invesco, Fidelity, UBS and Goldman Sachs have also joined the party.

Independent robo-adviser Betterment was the first to top $5 billion AUM when it passed the milestone in July this year, and following another round of investment the company is valued at $700 million.

New entrants to the market face the not inconsiderable challenge of customer acquisition, whereas companies already in the wealth management and financial services space have the ability to leverage an existing market position.

‘ETFs and robo-advice make a good marriage’

Those eyeing the opportunity would do well to act decisively as it’s a fast moving space; last year BlackRock acquired the US robo-adviser FutureAdvisor and has signed robo-advice partnership agreements with RBC, the Canadian bank, BBVA Compass, the US bank, and Saxo Bank in Europe.

Michael Gruener, of iShares, the ETF arm of BlackRock, says that there are a ‘large number’ of other robo-advice partnerships in the pipeline: ‘ETFs and robo-advice make a good marriage,’ he says.

Vanguard’s Personal Advisor Services is a hybrid model combining human and robo-advice; launched in 2015 it now has over $40 billion in assets.

Frank Kolimago, head of Personal Advisor Services, says that two-thirds of the clients that have signed up to service are aged between 55 and 75, thereby dispelling the myth that robo-advice is purely aimed at tech-savvy millennials.

Whilst undoubtedly increasing, public awareness around robo-advice is not yet high although the ETF issuers will hope that the new breed of advisers will have more success in getting their products into the investors’ tool kit than they have had.

Stephen Wall believes that developing trust in robo-advice among investors remains a significant challenge. ‘Most investors have simply never heard of robo-advice and have little idea of what it offers.’

DIY Investor (www.diyinvestor.net) and Muckle (www.muckle.online) will be here to lend a hand as this exciting market develops.