In terms of market share, robo-advice is currently very much in its infancy, with approximately $10 billion in assets at the end of 2015 spread out over 13 key players, according to Aite Group. This is a drop in the bucket of the estimated $33 trillion in investable assets of the 122 million U.S. households.
Is this movement primarily a retail phenomenon — not something coming to a DC plans anytime soon? Or is now the time to start developing a robo-advice strategy?
Robo-advice in the DC space can be expected to grow rather slowly over the next few years, says industry insider Jerry Bramlett. Writing in the spring issue of NAPA Net the Magazine, Bramlett notes that, “Ultimately, the growth curve may take on the shape of a hockey stick, with several years of low to moderate adoption. Eventually, as the technology matures and market acceptance expands, it will reach a critical mass and start to grow quite rapidly.” Bramlett expects this growth to be fueled by some strong trends:
- As robo-advice gathers steam in the retail space, there will be a natural spillover effect in the DC market.
- Since DC accounts tend to be much smaller than retail accounts, it is more costly to provide face-to-face investment advice, which would seem to be a perfect fit for a low-cost robo-advice interface.
- All web-based servicing (e.g., benefits enrollment) will continue to accelerate over time as interfaces become easier to use, faster, more personalized and increasingly ubiquitous.
- Robo-advisory firms are beginning to enter the DC space (e.g., “Betterment for Business”) and more can be expected to follow, creating a competitive challenge for traditional providers.
“If we look far into the future, it is not hard to imagine a time when core fund lineups, target-date funds, managed accounts, traditional investment advice, enrollment portals and investment education will all be replaced with a single digital advice interface,” Bramlett asserts. “In a single web interface scenario, the bulk of investment complexity and what many consider the ‘tyranny of choice’ will mostly disappear.”
Bramlett notes three common misconceptions about robo-advisers:
It is best to have a “wait and see” attitude.
The biggest mistake plan advisors, asset managers and record keepers can make is to think that they do not need a robo-advice strategy because it is simply too far into the future to worry about. “DC firms have three means to implement a robo-advice strategy: build, buy or rent,” says Bramlett. “If the decision is to build, it was important to have started yesterday.” The potential to buy or rent is limited to a relatively small number of startups available to fill that role. Consequently, he says, it is best to choose partners while there are still firms left that have the bandwidth to take on new partners.
Robo-advice eliminates the need for human advice.
At least one robo-advisor feels that their DC offering will be sold to plan sponsors mostly through the web, with some level of over-the-phone sales support, Bramlett notes — a means of selling that has had very limited success in the past and it is not expected to gain much traction for some years to come. “There is simply no pressing reason for a plan sponsor to forgo a direct interaction with a skilled professional who is physically present to help them work through the complexity of establishing and maintaining an DC investment offering,” he writes. “The cost tradeoff is just not worth it.”
Robo-advice disintermediates asset managers.
This common misunderstanding is rooted in the fact that many of today’s robo-advice offerings exclusively utilize passive vehicles, which are often delivered via an ETF lineup. This is mostly because the startup robo-advisors are primarily focused on technology and low-cost investing, and are not traditional asset managers, Bramlett notes. As traditional asset managers begin to distribute their offerings via a digital interface, he expects to see proprietary investment approaches to asset management (i.e., active). “Different firms operating under different brands on one platform will increasingly become the trend as certain robo-advisor platforms emerge as utilities serving multiple asset managers,” he believes.
The trend lines are all there to support the conclusion that the robo-advice model will ultimately have a big impact on DC investing, Bramlett believes, offering a quote from a 2015 Wall Street Journal article entitled, “The Uberization of Money”: “Over the next decade, the familiar 20th-century modes of banking and investing will give way to something very different. We are on the verge of the Uberization of finance, which will bring multiple new opportunities but also a range of new risks.”
For plan advisors and industry providers, Bramlett warns, “It would be wise to get out ahead of these trends and not be caught flat-footed when the ‘Uberization’ of the DC industry begins to accelerate.”
In addition to Bramlett’s regular “Inside Investments” column, the spring issue of NAPA Net the Magazine includes the cover story on NAPA’s top plan advisors under 40, as well as feature articles on custom TDFs and the Obama administration’s take on open MEPs. The issue also features insights from regular contributors Warren Cormier, Steff Chalk, Nevin Adams, David Levine, Brian Graff, Don Trone, Joseph DeNoyior, Jania Stout, Fred Barstein and Lisa Greenwald Schneider.
To view Bramlett’s column, click here and select “The Emergence of Robo-Advice in DC Plans.” And to view a pdf of the full 56-page issue, click here.
