Robo-Advisors Eat the Old Guard’s Lunch


Investing is becoming ever more commoditized with the rise of index funds and passive strategies, forcing financial institutions to differentiate themselves on user experience. The Old Guard institutions like Black Rock and Vanguard were built in an age when user experience was not a priority. The New Guard institutions, often called “robo-advisors” like Betterment and Wealthfront, are staggeringly easier to use than their Old Guard counterparts. They include features like Tax Loss Harvesting and retirement and purchase planning tools, no human advisor necessary.

Unlike the Old Guard, the New Guard was built from the ground up for the internet age. The Old Guard views their online presence as a transition and a feature- the New Guard views their online presence as their entire product.

In terms of assets under management (AUM), the largest of the Old Guard is Blackrock with over US$6 trillion, and Betterment, the leader of the New Guard, a mere 13 billion.

In the following predictions, “top three” refers to the top three firms in terms of AUM. “Robo-advisor” excludes Old Guard companies that also offer a robo-advisor product, e.g. Vanguard Personal Advisor Services. When I say “robo-advisor” I mean companies created exclusively after 2007.

With that said, here is what that lunch eating is going to look like (tweeted for posterity):
By 2025 a top three robo-advisor will offer a checking account. A checking account is a huge point of leverage for the New Guard. If you already have your paycheck going to them, it is that much easier to invest.
As of October 2019, Betterment offers a checking account.

By 2025 a top three robo-advisor will offer a credit card. Another leverage point for the New Guard.

By 2025 a top three robo-advisor will offer credit monitoring services similar to credit karma. The New Guard wants to be your one stop shop for all things finance, this feature is table stakes.

By 2025 the top three robo-advisors will collectively have >250 billion assets under management. A 1000% increase over the current 24.9 billion. Like I said,

By 2030 the top three robo-advisors will collectively have >1 trillion assets under management. A 4100% increase over the current 24.9 billion. i’m bullish.

By 2030 a top three robo-advisor will start, at least in part, to manage your portfolio directly, instead of relying on Old Guard investment vehicles like Vanguard ETFs. New Guard firms like Betterment are pretty UIs built on top of Old Guard investment products, like Vanguard’s VTI Total Stock Market ETF. Once they reach enough scale, managing their own portfolio directly will allow for further optimization which will cut costs for clients. Currently Betterment charges you an annual fee on top of the expense rations that Vanguard charges.

By 2035 the term “robo-advisor” will have peaked and will be on it’s decent for the same reason we don’t hear people say “color TV” anymore. Algorithmic, passive investing will be the standard for individuals. Google Trends or something similar will be used to track the validity of this prediction.

By 2035 assets under management of the top three Old Guard firms compared to the top three New Guard firms will decrease from 570 times as big to less than 50 times as big. Currently in the Old Guard corner we have Blackrock (6.2 trillion), Vanguard (4.9 trillion), and UBS (3.1 trillion) totaling 14.2 trillion. Currently in the New Guard corner we have Betterment (13.5 billion), Wealthfront (10 billion), and Wealthsimple (1.4 billion) totaling 24.9 billion. 14.2 trillion / 24.9 billion = 570. This prediction gets a bit fuzzy for two reasons. First, the New Guard still relies on investment products provided by the Old Guard, so there is some double counting here. I.e. for every dollar invested through Betterment, Vanguard is still managing some of each dollar because Betterment purchases Vanguard products. Secondly, since there is not reliable data available on AUM for IRAs and personal taxable accounts specifically, I need to look at total AUM. If there were reliable data on this metric, I would happily predict that the New Guard would gorge themselves on this specific market because it is the one that individuals have agency in. Individuals can’t choose which financial institution their employer’s 401(k) or 403(b) invest with. Even though Betterment offers a 401k product (and I’m sure other robo-advisors will soon), I don’t expect a quick transition in this space. Employer payroll systems coupled with Old Guard financial relationships with said employers, and you have one of the slowest changing mechanisms ever concocted.

Let’s see what happens people.