UBS, Bank of America, and Morgan Stanley stand out in the global wealth-management industry, with each responsible for handling more than $1 trillion in investors' assets. But they're now under siege from well-funded startups that offer a wide array of advisory services at a low cost thanks to broad use of automated functions.
These are the robo-advisers.
We're only in the first round of the wealth-management wars, but the sector—which has historically been dominated by well-staffed big banks and a network of good-old-boy relationships—is seeing its competitive landscape evolve rapidly.
While these old-school firms continue to draw multimillion-dollar clients, the robo-advisers have attracted so-called HENRY (that's “High Earning, Not Rich Yet”) clients, a new Goldman Sachs report says.
Betterment, Wealthfront, FutureAdvisor, and Personal Capital are among these new firms.
Many of these startups are actually backed by the competitors to Wall Street's incumbents in the wealth-management space. Citi Ventures is among the backers that have contributed more than $100 million to Betterment, and Personal Capital counts both USAA and BlackRock among its investors.
Startups in the wealth-management arena differentiate themselves, particularly with new HENRY millennials, through automated advising. According to Goldman, “viral customer acquisition strategies” target clients' tendency to tap into their social network to generate investing ideas. They're also doing it with lower fees than the incumbents.
In the short run, it's meant to get more millennials onto wealth-management platforms earlier. In the long run, it aims to keep them engaged as they grow older and need to manage more cash—by that point, startups are aiming to have scaled up client services to better compete with the bigger players.
The fees are key to big banks and other fund managers. Bank of America's Merrill Lynch unit is responsible for a double-digit portion of the bank's top line. It's even more meaningful for other fund managers, like Charles Schwab.
Another big advantage startups enjoy is their low investment minimums: between $0 and $100,000 (with Personal Capital being the highest). They need less in fees to pay a smaller staff, and lower fees also lets startups scale up faster with smaller investors.
One Wall Street source notes that banks' wealth-management operations offer services that most startups cannot: estate planning and a broader range of investment options.
“The robo-advisers work for middle class, or young people, who don't have much and just need to avoid fees,” one Wall Street pro points out. “They can't replace full-service advisers.”
Still, the Wall Street incumbents aren't just sitting there. Competitors to the new class of wealth-management firms have clearly taken note of the HENRY trend: Earlier this month, fund manager Charles Schwab launched its Intelligent Portfolios platform, promoting lower fees through automated technology.
Again, we're only in the first inning of the wealth-management wars.