Authored by: Garrette D. Furo, Partner of Wilshire Phoenix
Many individuals remain uncertain about how to manage their wealth when facing Wall Street. One study looking at client engagement with Wall Street by Makovsky found that a majority of individuals want to switch financial institutions. The reasons? The availability of lower fees and advanced mobile technology. (1)
Since the publication of the Makovsky survey, robo-advisor assets under management (AUM) has grown considerably. For those unaware, robo-advisors are an emerging sector in wealth management that package Individual Retirement Accounts (IRAs), cash management and even some financial planning within a simple application, often on mobile devices. Many of these services offer relatively sophisticated plays like tax-loss harvesting, and considering the infancy of the industry, LP commitments or smart beta strategies do not seem like stretches for application access at all.
By Q4 of 2019, the top five robo-advisors had a combined AUM of 187.5BB with Schwab (37BB) charging a 0% management fee by exclusively marketing their own funds. Other services like Betterment have tiered services: 0.25% of AUM for accounts valued up to $100k or 0.4% for assets over $100k for a premium plan that provides access to Certified Financial Planners. Consulting firm PricewaterhouseCoopers speculates that the market can increase by over 800BB in the next five years. (2)
Robo-advisors offer discounted access to wealth management often by using mean-variance portfolio optimization on Exchange Traded Funds (ETF), other large funds or individual share ownership. Many clients of the services are millennials who have been raised alongside automated services and prefer an offer from a fresh face rather than a traditional financial institution. Additionally, many of these services have low account minimums – some as low as one dollar – making them wildly accessible although small accounts may not include some high-touch features.
Methods of depositing cash into robo-advisory services are usually straightforward. One noteworthy method is the popular round-up which rounds up a users bank transactions to the nearest dollar and deposits the difference into an investment account. Indeed, this is an intelligent way to begin to grow wealth. The round-up deposit from a $3.51 cup of coffee can end up paying you back in full by the time you retire (assuming 40 years at 5% compounding). The robo model may pose risk to traditional wealth managers and likely increase the bottom line for custodians and fund issuers and administrators overall.
Niche investing within the robo-advisor space is becoming an increasingly popular trend with services rendering portfolios that are themed towards specific sectors, such as tech-takeout targets, defense and those focusing on dividend yield. Multiple robo-advisors are rounding up user transactions to the nearest dollar and depositing the difference into Bitcoin and other digital assets, another prevalent investment opportunity for young people.
The most significant opportunity within the robo-advisor space may be the integration of Socially Responsible Investing (SRI) and providing the architecture that allows users assign individual preferences to their portfolios. Bank of America has reported that SRI is a priority for at least half of millennials regardless of net worth. (3) Echoing Bank of America, Morgan Stanley reported that millennials are twice as likely to invest in companies or funds that target a specific social or environmental outcomes. (4) As these services grow – more dynamic investment and corporate governance opportunities are arising that can streamline and eventually introduce an individual’s engagement in corporate America.
About the Author
Garrette David Victory Furo, CAIA is a Partner of Wilshire Phoenix. Garrette is an early adopter of digital assets and decentralization who specializes in financial products and financial technology related to blockchain technology. Garrette has supported the public, and private sector on related matters and his clients have included mature ventures, bulge-bracket banks, and family offices. Previous to his tenure in the digital asset space, Garrette was a neurobiology researcher at Columbia University Medical School where he investigated autism and neurodevelopment related to the GI system. Garrette holds a molecular biology and alternative investments dual degree from Hampshire College and is recognized as a Chartered Alternative Investment Analyst (CAIA).
1. 2016 Wall Street Reputation Survey, Makovsky.
2. Asset Management 2020: A Brave New World, PwC.
3. 2013 U.S. Trust Insights On Wealth and Worth, U.S. Trust.
4. Sustainability Through the Eye of the Investor, Morgan Stanley.
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