ROBO ADVISOR: Game Over for Equities?

Source: State Street

Source: State Street

Let's land the ship in traditional equity markets. Josh Brown of Ritholtz Wealth Management summarizedthis development as "Game Over". State Street announced a new line-up of prices and names for its SPDR ETF family, which you can see in the graphic below. The average expense ratio shifted from 16 basis points to 6 basis points, a 65% decrease in cost for exposures to nearly any asset class for the regular investor. We have long been saying that industry digitization leads to revenue collapse in the short term as products become more automated. Think about music industry revenue falling 50% since the early 2000s, the retail industry owned nearly 50% by the online retailer Amazon, and roboadvice creating a wealth management price point at 25 bps instead of 150 bps. Here we are with investment management.

Not surprisingly, asset managers are shifting down the value chain from manufacturing financial product to building technology solutions for financial advisors. We discussed BlackRock's digital wealth strategy last week. Competition to gain market share and drive the cost of delivering financial advice is accelerating. This week we want to also highlight one way of mismanaging such acceleration. TD Ameritrade announced that it was refreshing its ETF Center for financial advisors with the SPDR line up, an in the process removing iShares and Vanguard alternatives from the no-transaction-fee line up

Here's why this matters. TD Ameritrade is a custodian, and holds hundreds of billions of assets overseen by independent financial advisors. It also has several partnerships with private-labeled roboadvisor technology providers, like SigFig, FutureAdvisor and AdvisorEngine. This software is used by advisors to deliver automated asset allocations for their smaller clients, which can only be done using no-transaction-fee ("NTF") instruments, otherwise the commissions from trading would destroy any gains on small portfolios. But of course, it's hard for a broker to make no revenue at all from these assets, which were mostly in Vanguard and iShares allocations. Michael Kitces, an industry consultant, suggests that State Street is paying for that NTF shelf space in a way that the other fund companies were not. The downside is that now the financial advisors have to rebuild their allocations with new products, and trigger capital gains for clients when rebalancing from Vanguard to State Street. Oops.