Will Robo-Advisors Disrupt The ETF Industry?

The appeal of an automated investment service, or robo-advisor, is picking up steam in the mainstream financial marketplace. As opposed to a traditional investment advisor that you have a personal connection with, an automated investment plan is typically implemented online with little human interaction.

The goal of these services is to implement a low-cost investment portfolio on your behalf based on the parameters that you set through an initial questionnaire. This includes portfolios that are tailored to risk, age, asset allocation, or investment goals. Then the service automatically selects a pre-determined mix of ETFs based on historical back-testing that fits your profile.

One of the things that I like most about these services is they continue to promote the benefits of using exchange-traded funds to build cheap, diversified, transparent, and liquid portfolios. The trend of investors moving away from high-priced actively managed mutual funds to streamlined ETFs continues to thrive in earnest. As these robo-advisors gain additional assets, they will likely continue to perpetuate this wave of education and migration that surely benefits the end investor through long-term cost savings and better performance.

Collectively these automated services have a few billion dollars in assets under management, which is relatively small in the context of larger fund companies and institutional players. As a result they build ETF portfolios from established brands such as iShares, Vanguard, State Street, and more. In addition, their management fees are often priced less than 0.25% per year and they often bundle transaction fees that you would normally pay separately to purchase or sell an ETF.

With such razor thin margins, the ultimate goal for many of these companies may be to have their own in-house or private-label ETFs that they construct and control. This would potentially give them a secondary revenue stream or further reduce transaction costs for existing clients. In addition, it could allow them to introduce unique indexes that differentiate themselves from competitors.

One example of a traditional investment advisor that is implementing their own ETNs is Fisher Investments. Just this month, Ken Fisher introduced two funds that are designed to be used by existing clients. These include:

  • Credit Suisse FI Large Cap Growth Enhanced Exchange Traded Notes (FLGE)
  • UBS AG FI Enhanced Large Cap Growth ETN (FBGX)

Because the advisor has existing client assets that they seed the fund with on day one, the initial results are quite successful. As companies such as First Trust and WisdomTree have demonstrated, the path to making significant headway in the mature stage of the ETF industry is all about having innovative products that add value over competitors at a reasonable expense.

The value-added proposition is one that these automated services have been fighting since inception. Most investors who hire a traditional fee-only investment advisor to implement an ETF portfolio on their behalf do so because they relish the relationship, service, research, or active strategies that are offered. In addition, investors that are seeking a risk-managed approach realize a successful outcome requires time, tools, and discipline to prevail over a buy-and-hold strategy.

The question most consumers have to ask is: If you are hiring an automated service to implement a passive approach, why not just do it yourself?

You don’t really need to pay a management fee for quarterly rebalancing of a static portfolio that will make very little real changes in response to your needs or market conditions. There are a host of free online portfolio construction models that will allow you to input similar data and receive a commensurate selection of low-cost investments.

At the end of the day, each investor considering a robo-advisor over a traditional asset manager should compare the cost savings with any additional value-added services that may be offered. In addition, an asset manager may have a unique philosophy that aligns more closely with your own method of investing. This can lead to peace of mind when choosing a third party to be the steward of your hard-earned nest egg.

I expect that these automated services are here to stay and will have a positive impact on the industry as a whole to price asset management services at more competitive rates. It will be interesting to see how they evolve in the coming years to include additional portfolios and services to clients.



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ETFs Investing US Markets