ROBO ADVISOR: Investment Management Fees Approach $0

Source: Fidelity

Source: Fidelity

Is automation finally catching up with the traditional investment management industry? A few data points say yes. First, Fidelity has unveiled the Fidelity Flex funds, which have management fees of ... you guessed it ... zero basis points. While there is a catch (these funds have to be held in Fidelity managed accounts), there is also pretty good exposure to asset classes. From bonds, to money market, to real estate, to small cap, the marginal cost of putting money into getting beta index exposure is nothing. As context, Fidelity's roboadvisor costs 35 basis points, while its human advisors cost 160 basis points. Same allocation we presume. Hmm.

Second, roboadvisor WiseBanyan has 30,000 clients and about $150 million in assets under management. Not a large business, but one that has good engagement with its customers and just raised $6.6 million. As a reminder, FutureAdvisor was sold to BlackRock for $140 million when they had about $700 million under management. And ... you guessed it .. WiseBanyan charges 0 basis points for financial advice. We don't have to remind you about fee-free trading from Robinhood for stocks and cryptocurrencies, their 5 million users, and $5 billion valuation


Two observations from this information. First, free is not a business! Unless you sell the data to someone who cares, or you upsell another product. And the latter is exactly what is happening all across Fintech. Investment Management is a loss-leader for other banking or insurance services. See for example, Stash partnering with Green Dot to offer banking accounts, or Goldman's digital lender Marcus moving into savings, or any of the other players (Acorns/Paypal, SoFi, Transferwise, Revolut, N26, etc). So the strategy is to get to the Millennial consumer, earn loyalty with at least one good service, perhaps free, and then lock them into a full financial services relationship. Sounds hard!

The other point is that some firms seem to be quite disconnected from this reality. For example UBS and SigFig have been working on an American roboadvisor for several years, just now launching UBS Advice Advantage. Strangely, UBS already has a platform in Europe called UBS SmartWealth. Two brands, two technology stacks, same market. This signals that there are still underlying legacy systems that require bespoke integrations. And second, the Advice Advantage product is priced at 75 bps, which is a price that reflects cost of manufacturing, distribution, and a line item for profit. Does the UBS roboadvisor have enough of an audience to build in that profit? Does it provide enough value to deserve it?