How Did Robo Advisors Grow So Fast?

The growth in the robo-advisor industry has been astonishing since leading robo-advisors, such as Betterment, launched in 2008. In just a single decade, the automated investing approach pioneered by Betterment and Wealthfront resulted in assets under management in the billions. The growth was so astronomical that major players, such as Schwab and Vanguard entered the fray.

Schwab launched its own robo-advisor, called Schwab Intelligent Portfolios, and quickly amassed tens of billions of assets under management with a compelling pitch: free portfolio management.

Vanguard’s robo-advisor, called Vanguard Personal Advisory Services, kicked off with a combination of human advice and automated investment management, albeit at high minimum account levels.

But what led to companies like Schwab gathering $30 billion in AUM and Financial Engines amassing over $100 billion?

The answer lies in structural flaws in the financial advisory industry. A single financial advisor can only realistically serve 100 or perhaps 150 clients at a time. When you factor in how much effort they need to invest in meeting clients, allocating their portfolios, managing their tax situations and fielding customer queries, anything above that limit would lower customer service quality.

Over the years, financial advisors realized there was a limit to how fast much they could grow and some clients realized the service level they had been experiencing was declining as their financial advisor took on more business.

So what was the answer?

Many clients took it on the chin and paid the same fees for lower service while others sought out self-directed solutions, opening accounts at brokerage firms like thinkorswim. As self-directed investors, gathering information became ever more important and these trading platforms offered technical chart studies, and back-testing simulation tools along with virtual trading capabilities.

Some traders sought out access to free stock ratings and researched the seasonality of stocks to make better trading decisions. Seasonal stock charts are helpful in spotting where a market may be headed before it gets there, and it’s information you don’t necessarily get to see on a regular stock chart. Others used stock ratings from third-party research outfits, while still others were glued to every tick during the trading day and made lightning fast decisions.

For financial advisors, a new path was forged. As they lost clients to brokerage firms like TD Ameritrade, the limit of their capabilities became evident and a disruptive band of entrepreneurs stepped into the competitive game to deliver automated investment management services that included tax loss harvesting, and other value-add services. In just a few minutes, a client could answer some questions and access a visually appealing platform that displayed portfolio value, gains, losses, and bucketed financial goals, such as saving for a wedding, a new car or a new home.

The simplicity and appeal of an investing approach that solved big problems in the financial advisory industry attracted the attention of venture capitals, who poured hundreds of millions of dollars into the robo-advisor arena. With ever more investment came ever more marketing investment and ever more clients. Competition skyrocketed among robo-advisors, so the pure automated technology based solution was enhanced with hedging at Hedgeable, a gender focus at Ellevest, and human advice and socially responsible investment at Betterment, and some other leading robo-advisors.

The predictions for future growth of the robo-advisor industry are astronomical. Companies like Betterment aren’t just growing at the rate of a few hundred million in assets every year but now they’re acquiring assets in the billions annually.

Amazingly in the first decade of their lives, robo-advisors didn’t experience a major drawdown or stock market crash. A big question will be how many survive and thrive during periods of decline in the foreseeable future.?

Inevitably the market cycles positively and negatively but how well will the robo-advisors, who adhere to a passive approach, do in these environments remains to be seen. Most likely the leaders will be so well capitalized that even large drawdowns in the major markets won’t cause too much disruption for the long-term but the smaller ones who fail to gather assets at scale and rely on revenues, which admittedly tend to be small – often as low as 0.25% of AUM annually – may suffer in harsher times.

The long-term trend however remains undeniably strong and the future bright for robo-advisors. And for traders who are self-directed and use charts, fundamentals, economic data, sentiment gauges and free stock ratings as a guide to decision-making, it may be worth taking a few minutes to explore robo-advisors and what they offer to you long-term also.