Competition may drive robo-advisers towards free model

Competition will eventually drive most robo-advisory firms to move towards a free model because there is not much on offer which is going to be highly valued by clients, according to Andrei Cherny, co-founder and CEO of Aspiration, the digital investment firm that lets clients decide how much it gets paid. Cherny’s comments come after Jamie Dimon, CEO of JP Morgan, said the company is considering offering its best clients a free robo-advisory service. SEI Advisor Network’s Raef Lee commented saying “no one is giving it away for free”, explaining it’s a question of understanding the money trail which give larger institutions greater leeway than startups which depend solely on the fees generated from robo-tools.

The impact robo-advisers are having on investment advice is not up for debate, but their worth is.

Online brokerage company ETrade announced earlier this week it was coming out with its own service, Adaptive Portfolio, that offers a hybrid of passive and active investing. It is charging 30 basis points with a minimum of $10,000. Just a few days before that, JPMorgan Chase & Co.’s chief executive, Jamie Dimon, said during a presentation that the company could give a robo-adviser to its best clients for free.

“The whole robo asset allocation is going to move toward free because there’s not much there that is going to be highly valued by clients,” said Andrei Cherny, co-founder and chief executive of digital advice provider Aspiration.

Not all robo-advisers are the same — some, such as Betterment, are goals-based; others, like TradeKing Advisors, offer risk-based. A few are hybrid models, including Vanguard Personal Advisor Services and Personal Capital, while others are strictly without the human touch, such as Wealthfront, which offers online help with no personal advisers. Their fee structures all differ, if even slightly, though there are extremes. Mr. Cherny’s platform, for example, lets the client decide the fee, what it calls the “pay what is fair model.”

Then there are the free services, such as WiseBanyan, a direct-to-consumer robo that recently began charging for certain services, and Charles Schwab & Co.’s Intelligent Portfolios. As competition arises, that may be the way all the services go, experts say.

“The reason Schwab set the bar there is reflective of a larger truth, which is that portfolio management in itself has become table stakes,” said Will Trout, a senior analyst with Celent’s wealth management unit. “In other words, it is a relatively undifferentiated product that can be done by an algorithm.”

Betterment and Wealthfront, two of the original robo-advisers in the market, charge 15 to 35 basis points and 25 basis points after the first $10,000, respectively. Vanguard Personal Advisor Services charges 30 basis points. Personal Capital costs 89 basis points up to the first $1 million.

Schwab shook up the industry last year when it rolled out its robo-adviser, marked it as free and mandated a cash allocation. Industry watchers called foul, saying that meant the platform wasn’t free, since the firm would generate revenue from the cash swept into Schwab Bank. Executives backed the company’s decision, saying cash was one of the best stabilizers.

“No one is giving it away for free,” said Raef Lee, managing director and head of new services and strategic partnerships for the SEI Advisor Network. “There is no such thing as that. If they are giving it away for free, it is the case of understanding the money trail and who gets paid and how.”

Larger institutions have more leeway than the start-ups, whose businesses thrive on this tool, he said.

Still, industry watchers acknowledge that service may become as ubiquitous as ATM machines, and that the looming threat of a free service will put pressure on providers of any digital advice.

“Firms will be able to charge for advice, but by advice I don’t mean portfolio management,” Mr. Trout said. “I mean more strategic, long-term, goals-based investment management.”

Rich Messina, senior vice president of investment product management at ETrade, said there are numerous aspects to consider when picking a price. The cost structure is built on what benefits the client, being “able to give them the services they really need and cover the cost that is involved in doing that on an ongoing basis,” he said.

There’s one more, newer, step any robo-adviser will need to acknowledge: the fiduciary rule. Asset managers are attune to this, seeing this technology as a way to cater to small accounts, but firms offering such a platform will need to identify how to offer advice in the best interest of their clients on any retirement account. The rule suggests compensation should come directly from the investor, Mr. Lee said.

“If money comes from anywhere else than the investor, it is going to get hugely scrutinized,” he said.