Perspectives: Robo Advisors and Retirement Planning: Echoes of the Dotcom Era…

As a veteran of the dotcom era’s modern portfolio theory-focused efforts at launching Robo Advisors (i.e. Rational Investors/S&P, Financial Engines, 401kForum/M-Power, etc.), a familiar business model development pattern seems to be playing out in the Robo Advisor competitive landscape.

Here’s the business model development pattern of the dotcom era:

- Starting in 1995-1996, Robo Advisors started with a B-to-C model ($9.95/month and they will come),

- By 1998, many moved to a B-to-B model focused on DC (pitching to plan sponsors instead of participants), and

- By 2000, the survivors had moved to a B-to-B model focused on the manufacturers (selling to the bundled DC providers instead of the plan sponsors).

- After March 2000, an unprecedented three-years of negative market returns shocked the industry and the category fell by the wayside… until now.

Today’s Robo Advisor market is to some extent following the dotcom play sheet.  Achieving profitability is a challenge, so the market will continue to evolve.

The acquisition of Robos by major players offers opportunities to leverage technology across large established businesses and client portfolios, and meet the retirement planning needs of less affluent households.

Dotcom era Robo Advisors changed the game in similar ways to the new generation of companies and technologies that are disrupting the market.

As the focus of clients shifts from accumulation (Wealth) to retirement income (Retirement Allocations - Wealth and Consumption), and new fiduciary rules loom on the horizon – the key question for the current generation of Robo Advisors is not how much they are changing the market, but how much they can change to meet the evolving needs of the market.

FrancoisGadenne

Francois Gadenne, Co-Founder, Chairman & Executive Director of RIIA

Comments

  1. says

    This is a response to Michael Case Smith’s very nice comment about this post on LinkedIn:

    Thanks for compliment. I think it was more luck than skill but like winning at the lottery, a key step is indeed buying a ticket and that may be the key skill of the start-up entrepreneur.

    That our software was built like a virus to have a small footprint that ran on our clients’ servers and thus behind their own data security perimeter - instead of building our own server farms - may also have been a factor.

    You hint at an important development since 2001: The changes in DOL’s IB 96-1 that watered down the requirement for an independent third party provider. This reduced the demand for independent robo providers. I wonder if the same thing will happen with the Fiduciary Rule.

  2. says

    This is a response to David Ehrenthal’s comment on our LinkedIn Group.

    He makes the demographic argument that robo may work well for accumulation with Millennials and not so much for retirement with Boomers.

    Being a member of the Boomer retirement cohort, one who is determined to keep writing with a fountain pen and making payments with paper checks, I can see the point.

    This is perhaps why I favor the view that robos for retirement will work well with automating retirement advisors rather than retirement clients.

  3. says

    This is a response to Andrew Barnett’s comment on the matching LinkedIn post. Andrew points out a story showing AUM flows in robos and the possibility that these may come from older HNW rather than younger mass-affluent clients.

    Good evidence but what should be our basis for trend and/or scale comparisons?

    Is there a study that compares the robo-flows to the flows ofother channels? Similarly, is there a study that compares the robo-AUMs to the AUMs of other channels?

  4. says

    Craig Iskowitz has an relevant article that gives a sense of proportions between some of the players.

    http://wmtoday.com/2016/02/26/dead-robo-walking-wealthfront-doomed/

    Wealthfront: Low single digit billions in AUMs
    Schwab’s Intelligent Portfolio: Mid single digit billions
    Wealthfront, Betterment and Personal Capital: High single digit billions
    Vanguard: low double digit billions

    Another message in the article: New features released quickly in order to keep pace.

    The Features Race reminds me of the 1990s in the DC space when fixed costs grew with each feature added in the features race between the providers.

    Laura Varas makes a great point: It is not just about AUMs, but also about information flow. A $2billion mutual fund would be a failed mutual fund.

    Developing…

    Interesting pairings:
    - BlackRock and FutureAdvisor
    - Invesco and Jemstep
    -

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