Industry Updates

Big ETF is about to crash the robo-advice party

David Tuckwell

The clock is about to strike midnight for robo-advice startups, as giant ETF issuers launch competitor platforms.

Small and independent robo-advisors are about to be eaten, as major American ETF businesses Vanguard, Charles Schwab and Fidelity start to copy their business model.

So quickly and completely will these ETF providers eat robo-advice that they'll have 93 percent market-share by 2021, according to a new study from Boston-based consultancy Aite Group.

"For robo-startups, it is do-or-die time now that incumbents are in the race," said Javier Paz, an analyst at Aite.

"Incumbents face a decision to grow their robo-business complacently or to do so with a greater sense of urgency, and we suspect most will pick the latter approach."

Robo-advisors use ETFs to offer online wealth management. Robo-advice is "robotic" in the sense that it uses algorithms to put its clients' money in ETFs, which typically offer diverse exposure and low fees.

But the danger is - and always has been - that anything an independent robo-advisor could do an ETF issuer could do better, the report said. There was nothing in this business model that blocked ETF issuers from entering. And big issuers brought with them greater brand recognition, a greater client base and lower cost access to ETFs.

"The giant vacuum-like sound coming from Vanguard funds as they draw increasing client assets demonstrates this brand's strong pull and makes it very difficult for advisory firms to break away completely from Vanguard dependency," the report said.

"Digital advisor firms have a compelling case to start lessening reliance on Vanguard ETFs and stop subsidizing a competitor's bottom line, but the alternatives are few."

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