We may be approaching 'peak robo-adviser': Roche
We may be approaching “peak robo”, as investors realise that they can buy the same products for lower fees without consulting automated services, according to Cullen Roche, founder of Orcam Financial Group. The entry of Merrill Lynch and Fidelity Investments into the robo-advisory market will potentially drive trillions of dollars of assets into the space by 2020, he said. "The only reason you would ever open a robo-adviser account is if you are unaware of the fact that you’re buying something that already exists in a lower-fee structure," he said.
The news of an executive reshuffling at Wealthfront comes at an interesting juncture for the robo-advisory industry. With growth slowing for some of the main players and more big names entering the game, it’s worth considering if we’ve seen peak robo adviser?

My view has always been the same: Robo advisers are mostly a fancy interface that implement a low-fee indexing strategy that amounts to little more than a target date mutual fund or some version of the Vanguard Tax-Managed Balanced Fund VTMFX, +0.05% .

The only reason you would ever open a robo-adviser account is if you are unaware of the fact that you’re buying something that already exists in a lower-fee structure. You know, the same reason why people own trillions in closet index funds and hedge funds ... sigh. I know I am harsh on issues like this, but I truly loath seeing high(er) management fees when you can buy something virtually identical for far less.

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But we’re about to see some serious firepower enter the space as Merrill Lynch and Fidelity Investments enter the fray. Those are firms, mind you, that I would argue have been behind some serious curves in the asset-management space so their entry here might be more disconcerting than anything else. Still, they will drive huge amounts of assets into their products. So it’s not unreasonable to assume that the robo space will see trillions in assets under management by 2020. Good marketing and sheer manager size will drive the asset growth, if nothing else.

So, no, this isn’t peak robo.

But we’re definitely at a point where the industry is incredibly saturated. I suspect that what we’ve seen here is a product wrapper that is packaged as a shinier-looking version of a product that already exists. And as people realize that they’re just buying a tax-managed target date fund with a bunch of extra fees added on, they’ll close up these accounts and buy the real thing instead.

As that trend reinforces itself, it won’t spell doom for these players, but it will mute growth substantially, just as we’ve seen across the entirety of the active-management space, which more and more people are realizing is little more than a version of something that exists in indexing form already.

Cullen Roche is the founder of Orcam Financial Group LLC, a financial-services firm that offers low-fee asset-management, private-advisory, institutional-consulting and educational services. He also is the author of “Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance,” “Understanding the Modern Monetary System” and “Understanding Modern Portfolio Construction.”

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