Will robo-advisers fully replace human financial advisers, because they're cheaper and more efficient?
No way. And those who think so misunderstand what financial advisers do.
"My clients pay me for advice, a holistic financial and retirement plan," as well as referrals to experts in trust and estate planning, said Michael Kitces, who runs a financial planning firm and follows the robo-adviser field.
He's a huge fan of robos, which offer automated portfolio management, as well as automatic saving and investing and cutting-edge adviser software.
"But, sadly, the robo advisers didn't understand the landscape they're competing with when they walked in. The investing site Betterment.com "and the like thought all advisers were mediocre, or at least all the same. And they're not."
Still, the rise of robo-advisers prompted many tech-savvy human financial advisers to sharpen their game.
The term robo-adviser is slang for low-cost, internet-only money managers that automate investing with few or no humans involved and offer extras such as tax-loss harvesting. Fees can range anywhere from zero (at Schwab, the robo-advisers are free, but you must have a minimum amount of cash on hand) up to 1 percent or more a year.
Robo-advisers often use passive index funds but can also pick stocks and bonds.
Until robo-advisers came on the scene, "none of us financial advisers appreciated how bad our technology was, because we were all comparing ourselves to everyone else's similarly bad tools. The robo-advisers provided a new point of comparison, and it was very embarrassing for everyone," Kitces said.
Robo-advised assets have grown more sharply among the Wall Street traditional firms compared with the start-ups: Vanguard now robo-advises $31 billion; Schwab $5.3 billion, Betterment $4.4 billion, Wealthfront $2.8 billion, and Personal Capital $1.8 billion, according to Joe Mansueto, CEO of Morningstar.
But robo-advisers as a trend may be peaking: The pace of new asset in-flows has remained relatively flat at start-ups Betterment and Wealthfront since the end of 2014.
Based on the latest Form ADV disclosures these firms file with regulators, the pace of asset growth at Betterment is about $150 million a month, flat versus a year ago, and growth at Wealthfront is down to $60 million a month over the last six months, Kitces estimates.
And robo-advisers may need $50 billion to $80 billion in assets under management to survive. The slowing growth implies that Betterment and Wealthfront may not even reach $10 billion in assets by 2020, he added.
The robo asset base is still very much in its infancy, and it's one that could carve out a meaningful role in the advisory business over time.
MyPrivateBanking forecasts growth of robo assets to reach $225 billion over the next five years. By comparison, the considerably more mature registered investment adviser industry (RIA) has an estimated $5 trillion in total assets, according to Jefferies analysts Daniel Fannon and Surinder Thind.
Which customers will adopt the robo-advisers over time?
A portion of the Gen Xers will be early adopters, Fannon wrote in a note to clients. But members of the millennial generation "will be a prime demographic target," because they are in the early stages of wealth accumulation, are more comfortable with technology, and are far more likely to bank online exclusively.
Also, a Pew Research Center study projects that the millennials - generally, the first generation to come of age in the new millennium - will make up more than 75 percent of the workforce by 2025.
Competition also forced change on traditional Wall Street the way online brokers did it in the late 1990s. That means some may not survive.
Since Betterment, Wealthfront and WiseBanyan.com entered the game, the industry giants revamped their offerings: Schwab Intelligent Portfolios was launched in March 2015, and Vanguard's solution came out in May 2015.
Redefining the Robot. "The robo adviser has effectively moved to automate the asset allocation process down to, in most cases, a basic online questionnaire that determines customer risk tolerance, and utilizes technology to build a low-cost diversified portfolio," explains analyst Thind with Jefferies in San Francisco.
Robo-adviser portfolios are designed to automatically rebalance around your targets and even offer tax-loss harvesting - selling losing securities to offset gains - above certain asset thresholds (for example, that level is $50,000 at Schwab).
Vanguard has an edge, given its low-cost product. Even leading providers Betterment, Wealthfront, WiseBanyan and to a lesser extent, Schwab, all utilize Vanguard ETF offerings in their respective portfolio construction.
"Advice-eligible assets could potentially be in the range of $2.5 [trillion]-$3 trillion by 2025," Thind said.
Jefferies' Thind says the heft and scale of Charles Schwab, and its ability to quickly raise assets, is one of its favorite stock bets in the area.
Start-up and established firms that use robo-advisers