Robo-Advisors: Industry Changers or Also-Rans?

Robo-Advisors
Industry Changers
or Also-Rans?
December 2015

2 Robo-Advisors—Industry Changers or Also-Rans? Copyright © 2015 Deloitte Development LLC. All rights reserved.
Three questions:
How big, how fast can robo-advice grow in the US?
What are the various business models competing for robo-advice
and which one can win the day?
Where is advice going, i.e., what’s the future of robo-advice?
1
2
3

What do we mean by robo-advice?
Example Robo-Advisor firmsRich Digital UI
Digital user interface with cutting-edge
user experience
Personal Surveys
Investor profile is personalized through
surveys (demographics, risk, goals, etc.)
Automated Portfolio
Allocation
Algorithm-based portfolio construction
and allocation
Automated Investment
Recommendations
Product recommendations

Robo-advice could be really big
$51
Tr.†
$32
Tr.
2015 2025
$5 - $7
Tr.
Robo-advice
< $100 Bn.
Mass Market 25% 40% 20%
Mass Affluent 60% 25% 20%
Affluent 80% 10% 5%
High Net Worth 90% 5% 2%
% Advised* % Advised
Captured by Robo*
% Not Advised
Captured by Robo*
2015 2025
Robo-advice: 10% – 14%
($5 – $7 Tr.)
High Net Worth
13%
Mass Market
10%
Affluent
18%
Mass Affluent
59%
Mass Market
5%
Affluent
26%
Mass Affluent
34%
TOTAL
AUM
US Retail AUM US Retail AUM
Key assumptions:
High Net Worth
35%
*Deloitte estimates based on industry knowledge and insights
†
Source: The Future of Wealth in America: Mapping Generational Shifts, Deloitte Center for Financial Services
As used in this document, “Deloitte” means Deloitte LLP and its Subsidiaries, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and
its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Robo-Advisors: Industry Changers or Also-Rans?
Looking through a generational lens to confirm
potential market size
$-
$10
$20
$30
$40
$50
$60
$70
$6 - $8
Tr.
2025
Silent Generation 5.0%
Baby Boomers 7.0%
Generation X 20.0%
Millennials 40.0%
Robo-Advice AUM Capture* 2025
Millennials
33%
Silent Generation
5%
Baby Boomers
25%
Generation X
37%
2013 2015 2020 2025 2030
Total AUM ($Tr.)
*Deloitte estimates based on industry knowledge and insights
Source: The Future of Wealth in America: Mapping Generational Shifts,
Deloitte Center for Financial Services
Robo-Advice
AUM
1925 1945 1960 1980 1997
Silent
Generation
Baby
Boomers
Generation
X
Millenials
~50%
of Total

Robo appeals to a new generation of investors, i.e.,
the re-wired investor
Anywhere, anytime
Wisdom of my tribe
Skeptical of authority
Risk defined
as downside
Typical mentalities of the re-wired investor
Not a second
class investor
Do it yourself
Stay in control Digital & personal
Just me

A possible growth pattern for robo-advice:
When disruption happens, it can happen fastPaceofInnovation
Exponential
Business
Innovation
Exponential technology
surges past status quo
Exponential technology
lags the status quo
Growth stabilizes,
and the next
innovation starts
Time (Years)
Source: Monitor Deloitte Analysis

We have seen disruption before
0%
2%
4%
6%
8%
10%
12%
14%
1991 1994 1997 2000 2003 2006 2009 2012 2015
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
0
2
4
6
8
10
12
14
1994 1995 1996 1997 1998 1999 2000 2001 0
5
10
15
20
25
30
35
40
45
1999 2001 2003 2005 2007 2009 2011 2013
ETF Market Share (Percentage)
ETFs
# of Accounts (Millions)
Online Brokerages
Estimated Total Assets ($ Billions)
# of Payments per Quarter- PayPal (Billions)
401(k)
Electronic Payments
Source: Various (See Appendix)

Robo-advice is poised for exponential growth
Digitalized
1. Advice begins to be
digitalized
Deceptive
2. A lot of hype but
incumbents ignore it
Disruptive
3. Well funded players invest in robo-
advice and combine it with human
advice. Assets are ready to move
Dematerializing
4. Add on of big data, predictive & algorithmic
analytics, cognitive computing, etc. More
complex. More holistic advice is automated
Democratizing
6. Automated advice has
become so cheap it is
available to everyone
Demonetizing
5. Advice is free, like an app on
your smartphone
Robo-advice is
here today
Source: Diamandis, Peter H., and Steven Kotler. Bold: How to Go Big,
Achieve Success, and Impact the World. N.p.: Simon & Schuster, 2015. Print.

More than just startups
≤ 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
• BlackRock (& FutureAdvisor)
• Capital One Investing
• Northwestern Mutual (& LearnVest)
• Schwab Intelligent Portfolios
• Vanguard Personal Advisor
Services
• Financial Guard
• Hedgeable
• HelloWallet
• Personal Capital
• SigFig
• Wealthfront
• Stockspot
• Money on Toast
• Betterment
• Jemstep
• MarketRiders
• Flat Fee
Portfolios
• Folio
Investing
• Nutmeg
• Portfolio
Monkey
• WealthBar
• Wealthsimple
Source: Various News Articles (See Appendix)
Phase 1:
New entrants
(mostly start-ups):
Connect/Advise/Invest
Phase 2:
Large investment and
asset managers build their
own solution or partner
with new firms
Phase 3:
Banks and insurance
companies enter the
market (mostly through
partnerships or acquisitions)

Could we have it all wrong?
Robo-advisor AUM is a
drop in the ocean: < $100
Bn. in a $30+ Tr. Market*
Time
Growth
Robo-advisors have not
experienced the impact
of a down market
Fees
Acquisition Costs
Thin margins,
compressed by low
fees and high client
acquisition costs
Not showing
exponential
growth yet
Traditional investment
firms fight back and adapt
their advisory models
Robo-advice:~ 0%
*Source: Monitor Deloitte Analysis
Overcoming trust
deficit associated
with new brands

Which business model
can win the day?

Distinct and overlapping business models:
Asset Manager
Robo-advice front-end with a range of
proprietary fund offerings
Stand-Alone, Pure Digital,
or Multi-Channel
A start-up still mostly independent, with online
and other digital channels, and potentially
access to call center
Corporate-Led
Robo-advice to engage with plan participants or
employees of corporations with Financial
Wellness program
Consumer Bank-Led
Targeted at large base of retail banking,
mass affluent clients (retention /
acquisition)
Multi-Advisory Model
Robo-advice combined with other complementary
advisory models within ‘closed loop’ system
Affluent Private Bank
Targeted at affluent client base,
complementary to traditional affluent advisory
model
Insurance-Led
Leveraging robo-advice to add more client value
in distribution (from product push to broader
wealth management)
Premium-Branded Investment
Firm
Leverage high-end investment brand to
overcome trust barrier and command premium
fees

What will drive success (i.e., capture market share)?
Managing Cost of Client Acquisition
Acquiring new clients (cost-effectively
overcoming the trust-barrier) vs. cross-
selling to an existing banking client base (or
retirement plan participants) to scale up
quickly
Embracing Multi-Channel Strategy
Combining digital and human channels (call
center, in-branch, digital)
Accessing Funding
Balancing staying nimble with access to the
funding needed to innovate and scale up
Meeting New Regulatory Compliance
e.g., pure algorithm-based advice satisfies
DOL ruling and resolves conflicts of
interest
Tapping Non-Advisory Revenue
Capturing economics of fund
manufacturing, retaining profitable
banking relationships (e.g., mass
affluent), and shifting product mix
(e.g., cash vs. ETF)
Charging the Price that Fits
e.g., pricing low to scale up vs.
pricing high to signal premium
value
Combining Advisory Models,
to Meet Client Expectations
while mitigating cannibalization with existing
customers moving to cheaper robo-advice
Having the right DNA and Competencies
Leveraging a firm’s Design DNA vs.
Investment DNA vs. Financial Planning DNA

The likely winners
Achieve low client
acquisition costs
Consumer Bank-LedCorporate-Led
Leverage brand to
support higher pricing
Maximize non-advisory revenue
e.g., fund manufacture
Offer the right mix of channels
to meet customer needs
Asset ManagerCorporate-Led
Premium-Branded Affluent Private Bank
Multi-Advisory Model
Remain nimble to rapidly innovate
next generation of advice
Stand-Alone / Pure-Digital /
Multi-Channel
Consumer Bank-Led
Consumer Bank-Led

Robo-advice is barely advice today
Goals-Based
Advice
Personal
Insurance
Robo-advice:
Portfolio Allocation,
Investment
Recommendation
Business
Succession
Planning
Estate
Planning
Cash Flow
Management
Tax Planning
and Tax Deferred
Investments
Moving from automation of portfolio allocation process to innovation around advice.

Broadening the scope of advice
Managing
healthcare
expenses, now
and in the future
Upsizing,
downsizing,
or buying a
vacation home
Home
Taking care
of your
family and other
people in
your life
Family
Spending
your free
time in
meaningful
ways
Leisure
Volunteering,
mentoring
others, and
giving to
charities
Giving
Working in
retirement,
selling, or
starting a
business
Work
Bringing it all
together and
defining your
financial goals
Finances
Advice is being automated across many different fields.
Automation can also facilitate integration of advice across multiple fields
Source: Merrill Lynch: “What are your priorities?”, www.ml.com
Health

Advanced analytics could be an exponential catalyst
MIS/Reporting
Monitoring everyday financial and operational performance
Descriptive
Providing a better understanding of business impact
and customer response
Predictive
Establishing data driven guidance for
decisions in the midst of uncertainty
Algorithmic
Tracking digital activity and
adjusting responses in real time
CognitiveMimicking the human brain through self-
learning systems, using data mining, pattern
recognition, and natural language processing

Where we could be heading
Source: Monitor Deloitte Analysis
Traditional firms
execute on advice
Technology firms
own the customer
Apple
HEALTH
HOMEFAMILY
LEISURE
FINANCES
Where Advice is
Created & Delivered
Where Advice is
Acted Upon
“Robo-Advisors: Industry Changers or Also-Rans” is an independent publication and has not been authorized, sponsored, or otherwise approved by Apple Inc.”

The authors
Gauthier Vincent
Principal,
Head of US Wealth
Management
Deloitte Consulting LLP
New York
203 905 2830
gvincent@deloitte.com
Phillip Klein
Manager,
Asset & Wealth
Management
New York
347 226 1506
pklein@deloitte.com
Adam Schneider
Principal,
Senior Advisor, Center
for Financial Services
New York
212 436 4600
aschneider@deloitte.com

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