Robo Advisor Trends & Innovations

Posted on March 11, 2021

  • 2020 was another significant year for robo advisor trends: Empower buys Personal Capital, Motif closes doors, ESG investing on the rise
  • Direct indexing becomes increasingly popular as BlackRock buys Aperio and Schwab buys tech from Motif
  • Walmart announced a partnership with Ribbit Capital potentially making financial planning more available – another major robo advisor trend

A Year of Change

This year saw the acquisition of Personal Capital and the closure of Motif, further slimming the landscape of independent robo advisors. Multiple acquisitions of direct indexing technologies have primed the industry for a wider application of this technology. Walmart announced a partnership with Ribbit Capital that may represent a significant step forward in the democratization of professional management.

The launch of financial planning tools by three major firms will help more Americans form some kind of financial plan. We look forward to what innovations will arrive in 2021, specifically in the areas of direct indexing, Environmental, Social, and Governance (ESG) investing, smart-cash management, and financial planning as each of these become more widely available and accessible to all investors.

Is Direct Indexing the Next Evolution?

Over the year, there were several significant transactions that included direct indexing technology. Charles Schwab acquired Motif’s technology stack in June, Goldman Sachs acquired Folio in September, Morgan Stanley acquired Eaton Vance—including its Parametric business—in October, and BlackRock acquired Aperio in November. In light of the Motif acquisition, Schwab’s chief digital, Neesha Hathi, explained that “We are thrilled to bring transformative technology to Schwab to help our clients navigate their investment needs in a more personal way.”

Similarly, Folio’s fractional shares technology furthers Goldman’s abilities to offer direct indexing. Parametric has been a pioneer in the direct indexing space for well over two decades through its “Custom Core” SMA, which now belongs to juggernaut Morgan Stanley. Lastly, BlackRock purchasing Aperio underscores this trend. In BlackRock’s press release, it described Aperio as innovating capabilities that “embrace the uniqueness of each investor and enhance after-tax performance,” and that it has “pioneered individually customized ESG portfolios.”

The use of models and automation has allowed robo advisors to offer professional asset management that has greatly reduced costs through scalable business models. The scalability of these platforms comes at the cost of portfolio customization. In the next decade, direct indexing may break this mold and give financial advisors the ability to provide both scalable and customizable asset management. While it is still unclear how direct indexing will be implemented at these firms and for which client segments, it may have profound consequences in ESG investing, tax optimization, and thematic investing.

The Democratization of the Financial Plan

Throughout the year, incumbent financial institutions introduced a surge of free digital financial planning apps. Bank of America launched Life Plan, Schwab launched Schwab Plan, and Fidelity launched Fidelity Spire. Each planning tool is accessible without signing up directly for the firm’s managed portfolio solution.

However, each has its benefits maximized when a user decides to invest. Schwab Plan is the most detailed of the group, allowing a user to thoroughly map out their retirement goal through a robust planner built with MoneyGuidePro technology. Fidelity Spire is focused on the younger generation, offering a simple app that lets investors model their relevant planning goals, make educated decisions on spending, and get bite-sized educational content along the way.

Financial Planning

Fidelity Spire and Bank of America’s Life Plan both focus on offering users a variety of financial goals that can either be achieved with a cash solution or a managed investment account. These apps are part of the “freemium” business model that independent robos pioneered.

Personal Capital and Wealthfront have long offered free financial planning tools as part of a funnel that leads to a formal relationship. Interestingly, Bank of America recently shared that users created approximately 475,000 customized plans in less than a month with the Life Plan. That number is a substantially larger one than most independent robo advisors’ total number of accounts. Wealthfront, for example, has just over 350,000 total accounts according to its latest ADV. Through the creation of this free planning app, Bank of America is able to tie together clients’ personal cash management with their long-term investing accounts, deepening client relationships and value propositions.

This is a win for the user as they can better plan for their future, and it’s a win for the investment firm as they can cross-sell their investment products to banking clients through the use of the app. In the future, we expect to see more of these free planning applications developed and released.

Robo Bankers

One trend that continued to be prominent during 2020 is the addition of cash management features at independent robo advisors. Betterment Everyday, Wealthfront Cash, Wealthsimple Cash, and Ellevest’s Money Membership are all examples of independent robos expanding their offering beyond investment management and towards a more complete financial service model. With the decline of interest rates, high-yield cash accounts have lost some of their initial luster, but the trend has already been established.

We anticipate independent robos to continue to expand their traditional banking services. This includes lending as well as innovative services like automated cash management.

Socially Responsible Expansion

Over the course of the year, digital-advice platforms continued to expand their Socially Responsible Investing (SRI) options. Firms such as Ellevest, E*Trade, Morgan Stanley, Betterment, and Wealthsimple have long offered clients the option to choose an SRI-themed portfolio. One of the most surprising elements of this trend is its magnitude. For example, US SIF studies showed that SRI assets grew approximately 40% between 2016 and 2018.

After launching three new SRI portfolio options in October last year, Betterment shared that year-to-date SRI assets under management grew at six times the rate of assets in its traditional core portfolio. The trend is clear. Whether it is in new ETFs, robo offerings, or direct-indexing customization, the ability for clients to invest in a way that supports their values is rapidly expanding and will continue to do so. 

Wealthsimple is also focusing on expanding its business through impact investing. In June, it launched two SRI ETFs on the Toronto Stock Exchange. While Wealthsimple already had an existing SRI-themed portfolio in 2016, it pushed further into the SRI investing industry by creating SRI ETFs.

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