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Thursday, July 21, 2016

Roboadvisor Fever Spreads to a Giant Bank

News summary by MFWire's editors

A banking giant has caught roboadvisor fever.

Tim Sloan, chief operating officer of Wells Fargo, tells Bloomberg that the plan is for Wells to start up a roboadvisor service, "probably ... some time in the first half of next year."

The Wells news comes as a prominent blogging financial advisor, Michael Kitces, tells Investor's Business Daily that he is worried about independent roboadvisors' future growth prospects. IBD notes that, according to Kitces, AUM growth rates for Betterment and Wealthfront (the two biggest independent roboadvisors, with $5.1 billion and $3.5 billion in AUM each, respectively) have fallen by two-thirds over the last year, to more than six percent (down from more than 17 percent) for Betterment and to more than two percent (down from more than six percent) for Wealthfront.

"It increases the risk that some robo-advisors may have to raise prices in the coming year," Kitces tells IBD.

"Betterment is the largest and fastest growing (robo-advisor)," Dan Egan, director of behavioral finance and investing for Betterment, tells IBD. "When something gets very large, growth is harder to sustain on a percentage-wise basis."

Indeed, Kitces says that roboadvisors are maintaining the same net inflows on an absolute basis. It's the relative growth that's the issue now.

"It's just that taking in the same money as the base gets bigger means the growth rate is falling," Kitces tells IBD.

IBD notes that "the outlook may be easier for robos that get gobbled up," i.e. sell to or become part of large financial services organizations, accessing both capital and distribution. Indeed, the two biggest roboadvisors in the business are offered by such financial services titans: Vanguard, whose roboadvisor Personal Advisor Services has $31 billion in AUM, and Schwab, whose roboadvisor Intelligent Portfolios has $8.2 billion in AUM.

Wells definitely fits into that latter category, whether it builds its own roboadvisor, or buys or teams up with an outside one. Bloomberg notes that the San Francisco-bank (market capitalization of $247 billion as of market close on Wednesday, July 20) has a variety of wealth management business units already: those units include an online platform, brokers in its bank branches, independent broker-dealer Wells Fargo Advisors Financial Network (FiNet), wirehouse Wells Fargo Advisors, and Abbot Downing serving ultra high net worth clients.

"What we don't have in that lineup is a robo-advising option," Sloan tells Bloomberg. "I don't think it's fundamentally going to change the investment business, but for a segment of our customer base they would like that -- they want to invest on their own, and that's terrific." 

Edited by: Neil Anderson, Managing Editor


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