eResearch | The robo-advisory landscape, once fragmented with start-ups disrupting the industry, is now changing as financial firms with large assets under management (“AUM”) are trying to catch up as they develop or acquire robo-advisory capabilities and undercut competition with lower fees.
The initial growth in robo-advisory can be attributed to investors seeking lower management expense fees, increased transparency in their portfolio holdings, and an option to invest with smaller principal in capital. Individuals under 30 are a target market for these robo-advisor products, as only 31% within this age group invest in equities due to hurdles such as lack of knowledge and limited capital.
In light of the low interest rate environment today, sophisticated, older, and risk adverse investors are now taking an interest in robo-advisors as they seek to improve returns and/or reduce costs.
According to Deloitte, the robo-advisory market is expected to grow in AUM to between US$2.2 trillion and US$3.7 trillion by 2020, and to US$16 trillion by 2025.
| Company | Robo-advisor | Management Fee | Minimum Investment |
| J.P Morgan Chase & Co | You Invest Portfolio | 0.35% | US$2,500 |
| RBC | RBC InvestEase | 0.50% | US$0 |
| Vanguard | Vanguard Digital Advisor | 0.15% | US$3,000 |
| Wealthsimple | Wealthsimple | 0.50 % | US$0 |
| Capital one | United Income | 0.50% | US$10,000 |
Below are some major banks and financial institutions that now offer robo-advisory products.
In July 2019, J.P. Morgan Chase & Co. (NYSE: JPM; LSE: 0Q1F; “JPMC”) launched You Invest Portfolios, a robo-advisor platform that utilizes algorithms to actively re-balance a diversified portfolio of Exchange Traded Funds (“ETF”). JPMC has a lower management fee than most robo-advisors at 35 basis points and plans to eventually lower its US$2,500 minimum investment limit to US$500 to increase its reach to new users.
Vanguard (Privately held company) launched it hybrid robo-advisor last year, which has successfully grown to over US$100 billion in AUM. Vanguard now plans to capture more market share as it announced this week that it plans to launch Vanguard Digital Advisor, a pure robo-advisor which significantly undercuts competition with its low fees of 15 basis points; the fees are even lower than the underlying ETFs which on average have a fee of 44 basis points.
A Royal Bank of Canada (TSX: RY; NYSE: RY; LSE: 0QKU; DB: RYC) survey asked non-investors what their main reason for not investing was and 55% of the respondents said it was due to lack of funds. In response, RBC announced this month that its robo-advisor platform, RBC InvestEase will be changing its minimum requirement to start an account to zero. RBC is heavily investing into marketing RBC InvestEase as it is offering to wave management fees for the first six months for investors who sign up for an account before the end of September 2019.
Last month, Capital One Financial Corporation (NYSE: COF; LSE: 0HT4; DB: CFX), instead of developing its own robo-advisor, acquired United Income, a robo-advisor registered in Washington, D.C. focused on individuals transitioning into retirement. Capital One already had a 10% vested interest in United Income but has now decided to acquire the whole company as it has grown to US$746 million in AUM with more than 750 accounts.
An example of an early leader in the industry is Wealthsimple Inc., a Canadian robo-advisor that was founded in 2014, supported by a strategic partnership with Power Financial Corp (OTC: POFNF; TSX: PWF; DB: PWF) in 2015, who invested C$165 million (89% ownership) across four tranches between 2014 and 2018.
Wealthsimple was successful due to its first mover advantage in the robo-advisory industry but it is now looking to diversify its product offerings with its growing user base as competition grows. On September 24, 2019, in an effort to expand product offerings beyond saving and investing services, Wealthsimple announced its acquisition of Simpletax, a Canadian web-based tax preparation service.
As large institutions use aggressive fee cutting strategies to take market share in the robo-advisory industry and smaller companies extend new product offerings in an effort to diversify its revenue streams, it will be interesting to see if the large institutions reach profitability with their platforms and if companies such as Wealthsimple will be successful in its venture into tax services.
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J.P. Morgan Chase & Co. (NYSE: JPM; LSE: JETI)
- Headquartered in New York City, United States,P. Morgan Chase is a multinational investment bank, and ranked as the sixth largest bank by S&P Global.
- JPMC currently trades at US$113.90 with a market capitalization of US$369.4 billion.
Power Financial Corp (OTC: POFNF; TSX: PWF; DB: PWF)
- Headquartered in Quebec, Canada, Power Financial Corp is a subsidiary of Power Corporation of Canada and is a multinational investment management and holdings company focused on the financial services sector in Canada, the United States, and Europe.
- PWF currently trades at C$29.68 with a market capitalization of C$19.7 billion.
Royal Bank of Canada (TSX: RY; NYSE: RY; LSE: 0QKU; DB: RYC)
- Headquartered in Toronto, Canada, RBC is the largest bank in Canada by market capitalization with multinational financial services operations.
- RBC currently trades at C$107.56 with a market capitalization of C$155 billion.
Capital One Financial Corporation (NYSE: COF; LSE: 0HT4; DB: CFX)
- Headquartered in Virginal, U.S., Capital One is the 10th largest bank in the U.S. by assets and specializes in credit cards, auto loans, banking, and savings accounts.
- Capital One currently trades at US$91.40 per share with a market capitalization of US$42.9 billion.
Vanguard (Privately held company)
- Headquartered in Pennsylvania, U.S. Vanguard is an American registered investment advisor who is the largest provider of mutual funds and the second-largest provider of ETFs.
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