INVESTING FOR THE 21ST CENTURY

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A BRIEF HISTORY OF ROBO-ADVISORS



INTRODUCTION


Robo-advising is a financial service where digital asset management and/or investing advice are provided by software with only moderate to minimal human input. The platforms use algorithms to invest in and routinely rebalance portfolios based on various investor-provided data, such as investment horizon and risk tolerance.


That all being said, to clear the air immediately, the term “robo-advisor” - at least to us - is a bit of a misnomer, at least currently. Robo-advisors are created and managed by humans. Humans design the investment strategies and humans write the algorithms meant to implement those strategies. What robo-advisors really offer, then, is a pared down means for investors to access professional-grade expertise at a reduced price by cutting the amount of human interaction down (intake meetings, careful selection of assets, routine checking in and reporting back to clients) that can add up to hundreds or even thousands of hours across the life of an investment portfolio to perhaps minutes (being the total time spent designing strategies and algorithms divided by many thousands, and potentially millions, of investors).


2006 - A TWINKLE IN THE PROGRAMMERS' EYES...


Algorithmic investing has been around for a long time; however, this technology wasn’t always available to the public. It wasn’t until 2006, with the launch of mint.com, that the idea began to gain traction with the general public. Mint.com was designed as a financial management tool that allowed users to track bank, credit card, investment, and loan balances and transactions through a single user interface. The tool also allowed users to create budgets and set financial goals.


The growth of Mint.com (eventually purchased by Intuit in 2009), is viewed as the evidence that investors were ready to start entrusting their financial information to websites and apps. The Great Recession in 2008 is often cited as the birth of the robo-advisor as we seem them today. This is cited all across the internet; however, we were unable to find a name to attach to these first 2008 robo-advisors.


2008 - THE FIRST ROBOTS ARE RELEASED TO THE WORLD...


The clearest information we can find is that Betterment was one of the first in this industry, if not first. Betterment was founded in 2008, but did not launch to the public until 2010. It is unclear if maybe this has been mixed up in the fast-paced reporting of the internet, where all the sources cite each other, but nobody seems to have an original source.


Betterment was born in 2008 out of the minds of Jon Stein, a Columbia Business School MBA graduate and Eli Broverman, a securities lawyer and NYU School of Law graduate. After two years of development and prototypes, Betterment launched in June 2010 at TechCrunch Disrupt New York and the rest is history. Betterment has become the largest independent robo-advisor, managing $13.5 billion of assets as of March 2018. Even if Betterment was not the first in the market, it was the company that really did create this industry.


2015 - THE ROBOTS BEGAN TAKING OVER...


From 2010 to 2014, the industry grew at a steady clip, including the birth of the industry in Canada in the form of WealthSimple (discussed in our next post), but it was in 2015 that it seems as though the big players in the market finally adopted the technology and the approach. 2015 saw a flurry of start-ups and acquisitions as the industry leaders began playing catch up:

  • Charles Schwab launched Schwab Intelligent Portfolios.

  • Vanguard debuted Vanguard Personal Advisor Services.

  • Northwestern Mutual took over LearnVest.

  • Interactive Brokers purchased Covestor.

  • Manulife Financial's John Hancock bought Guide Financial.

  • Bank of America announced it would build its own proprietary robo-advice platform.

  • Invesco acquired JemStep.

  • BlackRock acquired FutureAdvisor.

Many of the traditional players that had begun to offer robo-investing had begun doing so on a hybrid model basis, whereby access to human assistance was available for clients once they reached certain asset thresholds.


And the growth has continued on a worldwide scale. In 2015, when the explosive growth in services began happening, the assets under robo-management were $60 billion. Now, in 2018, assets under robo-management have exceeded $400 billion and it is projected that by 2022 this number will exceed $1.4 trillion.


2017 - HUMANS RETURN TO THE SCENE...


But just when it was beginning to look like the robots were taking over everything, 2017 and 2018 saw the industry begin to come full circle. The new fintech companies that have been born out of this boom have begun to offer hybrid services themselves. In 2017, Betterment changed from robo-only to having three different plans, with three different fee levels: Digital (0.25%), Plus (0.4%) and Premium (0.6%). The new Plus and Premium accounts have minimum account balances ($100,000 and $225,000, respectively), but come with financial expert assistance (once a year call and active monitoring for Plus, and unlimited contact, active monitoring and advice for Premium).


Also in 2017, Wealthsimple, the Canadian equivalent to Betterment (in the sense that it is digital only, independent (at least to begin with) and was the first on the scene), began offering “Wealthsimple Black”, to investors with balances over $100,000 entitling investors to one-on-one financial planning sessions from portfolio managers (among other perks, to be discussed in our next post).


CONCLUSIONS


The purpose of this post is only to give a brief history of the robo-investing industry. It is an industry barely 10 years old, but it has experienced a tremendous amount of growth and change. It is clear that robo-investing will change the face of investing in the years to come. However, this post is not necessarily meant to endorse robo-investors. Robo-investors offer, on average, lower fees that traditional financial and investment planners. Our next post will explore some of the differences, though, to help better understand the advantages and disadvantages of robots vs. humans.

 
 

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