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IPE special report May 2018

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Letter from the US: The robo-race starts

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Robo-advisers are gaining ground in the US retirement industry. Their success will have an impact on the market, accelerating the shift of assets out of actively managed funds and into index funds.

The latest evidence of the growing role of the robo-adviser was the acquisition of Honest Dollar by Goldman Sachs in March.

Honest Dollar is a start-up based in Austin, Texas, which began operating just a year ago and has only 25 employees. It was founded by William Hurley, a former master inventor at IBM, who is also the CEO. The attraction for Goldman Sachs was the potential market for Honest Dollar’s services: 45m working-age Americans who lack access to employer-sponsored retirement plans, mostly because they work for small and mid-sized companies that do not offer pension funds. 

Honest Dollar’s focus is on providing a service to small companies with between two and 50 employees. Honest Dollar’s website claims that it takes less than 90 seconds to set up an online account in most cases, costing as little as $8 (€7) per employee per month to access different kinds of retirement plans. 

Among the users are the drivers of ride-sharing startup Lyft. Each employee has to answer online a series of questions to assess their risk tolerance and an algorithm elaborates the appropriate asset allocation and invests the employee’s savings into one of six portfolios, all made up of four different Vanguard ETFs with average expenses of about 10bps of assets per year.

This compares very favourably against the 116bps that participants of small 401(k) plans with less 500 members have to pay on average, and the 70bps for those in plans with 1,000 to 5,000 participants according to a 2013 report by the Investment Company Institute and Deloitte Consulting. 

Asset managers specialising in low-cost index funds and ETFs, like Vanguard, will be the beneficiaries of growth in robo-advisory services. In May 2015 Vanguard launched its own robo-adviser – Vanguard Personal Advisor Services. In just few months it has amassed $32m in assets. However Vanguard’s service is a hybrid, combining human financial advisers with online automation.  

Because of this personal touch, Vanguard service costs 30bps per year, more than regular robo-advisers who can charge as little as 0.15bps.

BlackRock entered the robo-race last August, buying FutureAdvisor, an online financial adviser founded by a couple of young geeks – Bo Lu and Jon Xu – in San Francisco in 2010. 

FutureAdvisor manages retirements accounts including any existing IRA or taxable account from Fidelity or TD Ameritrade, and will continue to operate independently, while BlackRock plans to use the same technology for its own institutional clients through a white label product. Its target, according to Frank Porcelli, head of BlackRock’s US Wealth Advisory business, is the underserved market of mass-affluent Americans, who have between $100,000 and $1m in savings.

The two most active independent robo-advisers in the US are Betterment and Wealthfront, each managing around $3bn, and both founded in 2008. Betterment’s co-founder and CEO is an engineer, Jon Stein, who also studied Economics at Harvard and Finance at Columbia Business School. Wealthfront’s Chief Investment Officer is the Princeton economist Burton Malkiel, author of the passive investing ‘bible’ A Random Walk Down Wall Street.

Besides BlackRock and Goldman Sachs, many other large US institutions – from Fidelity to Bank of America Merrill Lynch – are considering buying a robo-adviser or creating their own. 

And this new industry is booming: assets have gone from almost zero in 2012 to a projected $300bn in assets under management at the end of this year, according to a recent report from AT Kearney, and could reach $2.2trn by 2020. 

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