Fin-Tech Advances

The Robo-Ecosystem

The history, emergence and ultimate utility of digital advisory

by Sean McDermott

Mr. McDermott is Project Manager with Corporate Insight, and leads the company’s research on financial technology (fintech) companies, monitoring dozens of investment- and personal finance-related startups. He was the primary author of one of the firm’s studies on this topic, “Next-Generation Investing 2015: Digital Advice Matures. Connect with by e-mail:

The ecosystem of “robo advisors,” or digital advice providers, has dramatically evolved over the last several years. Once viewed as Silicon Valley novelties, leading online advisors sought to disrupt the financial services industry through their low-cost, highly-transparent and digitally-centric philosophies.

Before 2008, wealth management software was only available to human financial advisors, who used it to automate their workload without passing on savings to clients and instead charging the same traditional advisory fees, usually between 1% and 3% of investable assets.

Enter The Robos

With the advent of robo advisors, that product was delivered straight to consumers without human financial advisors as middlemen. As a result, dozens of digital advice startups emerged that embraced a variety of different business models, including:

  • Low-cost online managed account
  • Algorithm-based investment advice
  • Online-only financial advisors
  • Retirement-plan specific advice
  • Online financial planning tools
  • Online financial advisor search and review tools
  • Customizable ETFs
  • Trade mimicking

Many startups that took a direct-to-consumer model have struggled to achieve scale. In particular, the popularity of standalone algorithm-based investment advice has declined in recent years. Some of these consumer-focused firms have thrived, particularly the low-cost managed account providers like Betterment, Personal Capital and Wealthfront. Today, these three firms collectively manage over $20 billion in assets, up from 16.3 billion in Q1 2017.

While the media has played up the idea that fintech startups are crashing Wall Street’s party, many of the startups have pivoted to a B2B model, helping established financial institutions become more efficient and digitally capable. Some of the biggest fintech firms – like Betterment and SigFig – entered partnerships with established firms they once saw as the enemy. A lucky few, like Covestor, FutureAdvisor, Jemstep and LearnVest, were acquired by large financial services firms. And new companies like Aspiration, Blooom and Dream Forward Financial have emerged, as investor interest in the fintech space shows no sign of abating.


Perhaps the best example of how startups can both challenge long-established industry practices and partner for mutual benefit is LendingClub. Founded in 2006, Lending Club managed to go from a startup to a major force in the loan industry in just eight years, launching an IPO in late 2014 that raised $1 billion.

While the media has played up the idea that fintech startups are crashing Wall Street’s party, many of the startups have pivoted to a B2B model, helping established financial institutions become more efficient and digitally capable

Lending Club provides a P2P marketplace that connects borrowers and investors, allowing them to bypass traditional lending institutions. Customers interested in a loan can complete an application on the site and Lending Club will determine a credit rating and assign appropriate interest rates. Investors – both individuals and institutions – can then select loans in which to invest and earn monthly returns in the process.

Like many of its fintech peers, the firm has continued to innovate, but in a way that should help established financial services firms. Lending Club recently announced that it will offer a new application programming interface (API) enabling advisors and brokers to integrate its service directly into their websites. This will make Lending Club Notes available to the retail clients of firms/advisors using the API.

The low-cost automated managed account model takes the concept of a professionally managed investment account and moves it to the web, lowering the associated costs by removing the human element and simplifying the underlying investment mix to a basket of low-cost index-based ETFs and/or mutual funds. The minimum investment for many of these services is as low as $5,000 and fees are competitive with a target date fund, usually falling below 0.5% of assets.

The success of the automated online managed account providers has not gone unnoticed in the financial services industry. In 2015, Charles Schwab and Vanguard made headlines when they both publicly launched proprietary online managed account services, Schwab Intelligent Portfolios and Vanguard Personal Advisor Services. Asset managers BlackRock and Invesco also purchased leading digital advice providers FutureAdvisor and Jemstep, respectively. And from mid-2016 to early 2017, Capital One Investing, E*TRADE, Fidelity, Merrill Edge and TD Ameritrade all launched their own online managed account services.


Given the increasingly crowded nature of the digital advice marketplace, digital advice providers would do well to understand the key characteristics of “Robo Embracers.” Robo Embracers, or investors who use a robo advisor or express string interest in doing so, differ from other investors in key ways. In our February 2016 survey of online investors, age proved to be the most obvious difference between those who use or are very likely to use a robo (i.e., a “Robo Embracer”) and other investors.

The average Robo Embracer in our survey is age 44, while the average age of all other investors in our survey is 59. Robo Embracers are also more likely to identify as Asian or Hispanic compared to other investors, and more likely to be female. They are also much more likely to say that they want to find ways to make investing less complicated. In terms of their digital demands, they assign much more importance to planning tools, educational content and market alerts, news, research and screening tools than other investors do.

The mainstream adoption of the online managed account model may be the biggest development in wealth management since the Financial Crisis. The years ahead promise to see the sophistication of these online managed account services continue to evolve as firms compete to grow their digital advice market share. Firms that fail to not only monitor this space but also continually innovate and improve their digital advice services through iterative changes will be left behind. ◊