(Bloomberg) -- How big a threat are the new batch of robo-advisors to traditional active fund managers?
Are they, as Sanford C. Bernstein & Co LLC put it in a new research note, an "innocuous robot like R2-D2 or are they Terminator?"
To answer the question, Bernstein analysts opened multiple accounts at two prominent European-based robo-advisors, Nutmeg Saving and Investment Ltd. and MoneyFarm SIM SpA.
While they came away impressed with the accounts — one high-risk model portfolio was forecast to deliver at least 6 percent per year net of fees — they find it hard to believe that big industry incumbents won't break through what they see as low-barriers to entry for a growing industry.
Robo-advisors, which feature relatively low fees and an investing-on-autopilot approach, have so far been expanding as investors shift towards passive management strategies rather than active management which has been tarnished by a stigma of high commissions and lackluster performance.
"The robo-advice approach looks to have a rosy future, though not necessarily the current robo-advisors themselves," the team, led by Inigo Fraser-Jenkins, write in the note. "Barriers to entry for the actual robo part are very low we think. So this may well be exploited by more established finance (or tech) brands with a broad distribution capability," they write, adding that a number of large asset managers like Vanguard Group, Northwestern Mutual Co. and Charles Schwab Co. have already jumped into the space.
Tech giants Alphabet Inc. and Facebook Inc. have also taken a look at the asset management industry in recent years.
The largest robo-advisors in the U.S. had roughly $60 billion in total assets under management as of September 2016, according to Bernstein's estimates.
While still a small piece of the nearly $70 trillion asset management industry, a forecast by McKinsey & Co. expects the funds managed by robos to grow substantially in the future with the potential to encompass $13.5 trillion worth of assets if more affluent households start to move larger portions of their assets into the passive strategies at robos.
Robo-advisors "are more R2-D2 given they currently account for only a very small portion of invested assets," Bernstein concludes. "The most immediate issue caused by the robot advisors is that in their current form they accelerate the already relentless shift to passive investments and thus put additional pressure for those active funds to have substantially lower fees to make them competitive."
If that pressure continues to grow then the robots could be looking a lot less cuddly to active fund managers.
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