In addition to more common registered investment adviser (RIA) technology categories such as customer relationship management (CRM), portfolio management and reporting, and financial planning, a new category of "online portfolio management platforms" is emerging. While the current RIA industry adoption of these new online RIA platforms is barely noticeable, we wanted to provide a brief overview of this new technology category which is beginning to attract more industry chatter and debate.
Three online portfolio management platforms that have been recently introduced to the RIA industry are:
- Betterment Institutional: Betterment Institutional is technically a solicitor-only RIA firm that refers RIA firms and their clients to the Betterment platform. As of February 2015, Betterment currently has $1.426 billion in assets under management (AUM) serving just over 65,000 investor clients. The majority of those assets come from the firm's primary business which is a direct to consumer investment platform. Betterment fees begin at range from 15-35 bps (0.15%-0.35%). All portfolios are held in a wrap account so the portfolio management fee includes all trading and transaction fees. The diversified portfolios feature low-cost, passive exchange-traded-funds (ETFs). Accounts with $50,000 or more qualify for tax loss harvesting. Betterment, like many other online advisor platforms, is venture-backed and has raised $105 million in venture capital to date.
- Upside: Upside was launched to exclusively provide automated portfolio management services to RIA firms. Upside builds diversified portfolios with low-cost, passive ETFs. The cost is generally 25 bps (0.25%) for clients with less than $10 million in assets. As of February 2015, Upside, which is a new platform, manages less than $1 million in AUM across 21 total accounts. Upside has also raised $1.2 million in venture capital. Update: On February 26, 2015, Envestnet announced its acquisition of Upside.
- Jemstep: Another new offering, Jemstep charges a monthly subscription fee for its online platform. In addition, Jemstep manages portfolios and charges 100 bps (1.00%). As of February 2015, Jemstep's AUM is just over $7 million. Jemstep has raised $15 million in venture capital.
There are also a number of "robo-advisors" that presently do not offer portfolio management services to RIA firms and instead exclusively focus on directly serving retail clients. The most notable of this group is Wealthfront. As of February 2015, Wealthfront manages just over $1.7 billion in AUM for 18,800 clients. To date, Wealthfront has raised $129.5 million in venture backing.
It's also important to note that Schwab will soon also be launching its own automated advisory platform (Update: On March 9, 2015, Schwab officially launched Schwab Intelligent Portfolios) that will be made available to RIA firms utilizing Schwab's custody platform. The service will charge no direct advisory fee to investor clients but will require portfolios to maintain a certain percentage of cash with the Schwab bank.
What types of RIA firms are beginning to utilize these automated investment platforms?
In our experience, a small handful of RIA firms have thus far looked to use these new platforms. Such firms generally fall into one of these three categories:
- Newer, financial planning focused firms that do not view portfolio management as one of their firm's core competencies. Much like these types of firms have been early adopters of traditional turn-key asset management platforms (TAMPs), these newer RIA firms are also viewing these new, automated platforms much in the same way that they have traditionally viewed other TAMP-like offerings. This group is also often drawn to these new platforms given that they often share a bias towards a passive investment philosophy. These are also the types of firms that have traditionally been drawn to various TAMPs that provide access to Dimensional Fund Advisors (DFA) mutual funds.
- Larger, more established RIA firms that are looking to provide an adjacent, often separately branded offering to reach younger or less affluent clients that the firm could not previously serve due to higher account size minimums. Most investment advisory firms historically have not been able to profitably serve less affluent clients due to the cost of servicing and providing portfolio management services to a smaller client. These new online platforms are allowing some larger firms to open up a new client acquisition channel in a potentially more cost efficient manner. One notable example of such a firm is Upside powering Ritholtz Wealth Management's new "digital offering" called LiftOff.
- The newest group are RIA firms being started to solely provide an online offering. These are firms looking to start their own "robo-advisor" by partnering with or white labeling the portfolio management services being offered by one of the growing number of online investment management platforms serving RIA firms.These internet-only investment advisory firms are generally focused on a particular, historically under-served niche (e.g., millennials) and targeting a smaller average client size than traditional investment advisers.
Haven't traditional TAMPs already been providing automated passive portfolio management for years?
The answer is yes, however perhaps the greatest innovation of these new online RIAs is that they are providing automated portfolio management at a much cheaper cost and minimum account size. For example, Betterment includes automated tax-loss harvesting for no additional charge beginning at $50,000 account size. Traditional tax-loss harvesting strategies have traditionally only been accessible to ultra high net worth (UHNW) client segment.
Ok, but will these robo-advisors ever become sustainable, profitable businesses?
This question is an ongoing debate. Many of these platforms have been quite successful at raising large sums of venture dollars but still have a long way to go to ever achieving profitability. In particular, a number of the early online platforms are now starting to re-position themselves as a third-party investment platform option for RIA firms instead of focusing on going direct to consumers. With that said, no online RIA platform to date has built a sizable institutional business serving more traditional investment advisory firms.
It seems quite unlikely that the majority of these robo-advisor will ultimately succeed, however there is a chance that a handful may turn into viable businesses one day.
Are online RIAs a fried or foe of traditional RIA firms?
We strongly believe that these platforms will over time greatly benefit the traditional investment adviser industry. The technology that these new online advisers have developed will continue to drive improved efficiency in the broader portfolio management industry. Such technological advancements will allow RIA firms to not only profitably serve a wider array of clients but also allow firms to offer their clients more cost-efficient investment options and focus human time on more holistic wealth planning services that are highly valued by clients.
Do these new online investment managers work with traditional custodians?
It depends on the provider. Jemstep, for example, is today just integrated with TD Ameritrade Institutional. Upside positions itself as working with a number of traditional RIA custodians. On the other hand, Betterment Institutional has pursued a more vertically integrated model. Betterment has established its own broker-dealer firm and client assets are ultimately cleared through Apex Clearing Corporation. Many other robo-advisors also clear through Apex Clearing Corporation including Wealthfront.
As RIA compliance consultants, we strongly encourage the Chief Compliance Officer (CCO) of every RIA firm that is considering partnering with or utilizing the services of an online portfolio management platform to perform thorough due diligence. It's crucial that any investment advisory firm working with one of these new online platforms has the proper understanding of the portfolio management process being utilized and is fully aware of the associated risks involved with working with a new entrant to the portfolio management space. Ultimately, every RIA firm will need to make its own independent decision whether one of these platforms may make sense for the firm's clients and be sure that clients are educated and informed.