The latest research from Corporate Insight on the emerging online advisory space shows notable growth.
Eleven leading startups in the "fintech" space now have about $15.7 billion in assets under management, up from $11.5 billion in April — more than a 35 percent increase in just a few months.
Grant Easterbrook, Corporate Insight's analyst who tracks the start-up corner of the financial world, concedes that while the overall AUM represents only a drop in the bucket, the trend suggests growing consumer demand for low-cost, tech oriented financial services, especially from younger investors.
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"These firms are new, they're growing, but they're still small," says Easterbrook, who's spent the last three years researching the investment start-up space, culminating in next week's release of a study examining the challenges and opportunities ahead of tech-based advisory products.
"None of these firms are in this to take out the Merrill Lynchs of the world overnight. Mostly, they see their products as addressing the demographic realities facing the financial industry."
Gen X and Gen Y investors — some of whom aren't so young anymore, and are starting to aggregate significant wealth — have grown up on Web-based solutions. They were also witnesses to the financial crisis, and the cynicism of Wall Street it spawned. As consumers, Web-based services save them money on everything from travel to groceries.
So why shouldn't they be able to do the same with how they invest retirement savings?
"These are realities the industry as a whole is going to have to address," says Easterbrook. "No one will be able to grow without addressing the demographic shift and the consumer habits that will come with it. The new players in the fintech space are best positioned to capture the demographic shift."
But can the technology replace the human touch? That's the $64,000 question.
Easterbrook says that much of the investment and innovation behind the movement was an indirect consequence of the financial crisis.
That means online advisory services have yet to prove their value in times of market calamity.
"We'll see how they perform. Only time will tell," says Easterbrook.
While tech innovations support plan sponsors, and their advisors and service providers, the "robo" advisory movement isn't yet gunning for the defined contribution space. Easterbrook thinks it's possible that that may come if they are able to continue to prove their value in the retail space.
For now, the technologists and financial minds behind the movement seem fixed on the retail market.
As tech-based startups, are these companies hoping to make a quick splash, only to be acquired by the broker dealers or wirehouses that dominate the industry?
Easterbrook warns against the presumption.
"It's the classic case of new technology disrupting an existing business model," explains Easterbrook. "Is a wirehouse going to be willing to buy a technology that may reveal the cost inefficiencies of their core products and services to consumers?"
Again, time will tell.
But given the recent growth in assets under management, and according to Easterbrook, the venture capital that continues to flow into the space, it's safe to say the robo movement isn't going away anytime soon.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
