Robo-advisors, once touted as the next big thing in investment management, have encountered significant challenges. Many start-ups have either failed or been acquired, and none have successfully gone public.
Despite this, client money continues to flow into robo-advisors, with total assets under management at these digital platforms surpassing $1 trillion, as reported by Condor Capital Wealth Management, which has been tracking the industry since its inception.
A decade ago, start-ups like Betterment and Wealthfront had ambitious plans to capture a substantial portion of the now $50 trillion advice industry. In 2015, one robo CEO even predicted a disruption on par with the rise of e-commerce. However, those grand visions have largely been scaled back as the focus shifted from innovation to cost.
David Goldstone, manager of investment research at Condor, notes that in the early days, the low cost of robo-advisors was expected to be enough to drive their success. While lower fees are important, they have not proven to be the foundation for a truly transformative business.
Over time, the sector has evolved. Betterment, a pioneer in the space, has integrated human advisors into its offerings, now charging up to 0.65% on client assets for this hybrid approach, compared to 0.35% a decade ago. Traditional human advisors typically charge around 1% of assets.
Wealthfront, on the other hand, has remained committed to a purely digital model, expanding its services to include features like debit cards and high-yield cash accounts.
For robo-advisors, the path to profitability lies in achieving scale. Success stories in digital advice often involve significant investments in client acquisition and embedding the robo service within a broader wealth management ecosystem that includes self-directed brokerage and access to human advisors, according to Goldstone.
One strategy is to attract younger clients who are in the early stages of accumulating wealth but may require more sophisticated financial planning as they grow older. "Starting early with a robo-advisor makes sense if you want to grow alongside your client," Goldstone says.
However, the grand ambitions for robo-advisors have largely been tempered. This has become especially evident over the past year, as major banks like JPMorgan Chase and Goldman Sachs exited the business.
A JPMorgan spokesperson acknowledged in December that the robo-investing business had not scaled or become profitable for many, including the bank. "We believe our self-directed and advisor-led platforms offer great alternatives to our clients and are focusing our resources there," the spokesperson said. Goldman, meanwhile, closed its Marcus Invest robo-advisor and transferred the accounts to Betterment, as part of a broader pivot away from retail customers.
Betterment itself has diversified, emphasizing its retirement and custody business lines. The latter provides services to independent financial advisors, safeguarding client assets and offering a wealth management platform. Betterment now manages over $50 billion in assets and serves approximately 900,000 customers.
The firm has also developed a premium service that grants robo-advisor clients access to human financial planners. According to CEO Sarah Levy, this service has become a "graduation path" for clients as they hit key life milestones like purchasing a home or starting a family.
This evolution means Betterment now resembles larger competitors like Charles Schwab and Fidelity, which operate popular robo-human hybrids alongside their traditional full-service wealth management offerings. "We can look like the incumbents but with better technology," Levy says.
Indeed, the incumbents have largely won the robo race. Vanguard leads the pack with $312 billion in robo assets, followed by Edelman Financial Engines and Morningstar Retirement Advice, both of which focus on automated advice for corporate retirement plans. Fidelity and Charles Schwab round out the top five, with $114 billion and $81 billion in assets, respectively, according to Condor’s data through December 31, 2023.
Bank of America’s Merrill Guided Investing and its hybrid option manage over $30 billion in assets. Aron Levine, president of preferred banking at BofA, notes that their hybrid robo-advisor is growing faster than the purely digital offering. "Clients almost always prefer to have someone to talk to," he says.
Similarly, Fidelity found that many investors appreciate having access to human advisors even if they primarily interact digitally. The company integrated its digital robo-advisor into its hybrid service in 2022 and has been "aggressively" investing in the business, says John Danahy, product area leader of digital planning and advice at Fidelity. "We don’t see [the robo] as a steppingstone. We see it as customer choice across the spectrum," Danahy says.
Executives at BofA and Schwab report an increasing number of clients near or in retirement using their hybrid robo-advisor services. BofA recently launched income-focused portfolios for retirees, while Schwab's Intelligent Income tool, which helps clients manage multiple income streams, has gained traction. "Decumulation is personal and challenging to automate, but some clients prefer digital interfaces over traditional advisors," says Kristina Turczyn, managing director of Schwab’s digital advice and wealth solutions.
Schwab, one of the nation’s largest wealth managers, serves both retail investors and financial advisors. While its digital-advice assets are a small portion of its $9.4 trillion AUM, the segment has averaged 11% annual growth. "We believe automated investing is here to stay and is a great choice for clients who want to invest in an automated way at a low cost," Turczyn says.
Wealthfront, one of the original robo-advisors, continues to stick to its digital-only approach, adding features like automated bond ladder accounts and high-yield savings options. The company now manages approximately $70 billion for over 800,000 clients.
In Condor’s latest ranking, Fidelity Go took the top spot as the best robo-advisor, cited for its performance, low fees, and lack of an investment minimum. Merrill Guided Investing and SoFi Automated Investing round out the top three, with Merrill scoring well for performance and access to human advisors, and SoFi earning high marks for low costs.
Condor’s analysis, which includes seven years of performance data, notes that robos with larger allocations to U.S. large-cap growth stocks have outperformed recently, a trend that aligns with the broader market's focus on high-performing technology stocks.
