Roboadvisors and ETFs: Product with built-in distribution channel?

Respondents to EY’s latest yearly survey (pdf link) of the global exchange-traded funds (ETFs) and products sector think highly of the tie-in with automated investment advice platforms (roboadvisors).

On the distribution side, managers and promoters of ETFs recognize the need to invest in a dedicated salesforce to drive sales of the investment product. But there’s been a demonstrative surge in interest around digital distribution channels.

According to the report’s authors:

Even so, there is a particularly strong sense that the digital dawn could be a “Eureka” moment for the retail take-up of ETFs. After all, the product and the technology share some common themes: low costs, transparency and breadth of choice. Of those surveyed, 90% view digital channels as an area of opportunity, and 89% expect robo-advisors to accelerate the growth of the industry.

Respondents see a powerful tie-in with traits jointly shared between roboadvisors and ETFs. It’s this overlap that’s concerning to some some experts in the industry who don’t see robos as a new manifestation at all. Rather, according to this viewpoint, it’s just an old financial product (ETFs) with a new distribution channel (roboadvisors).

According to Investment Advisor Magazine‘s Editor-at-Large, Bob Clark:

This suspicion was confirmed in a conversation I had the other day with Babara Roper, the Consumer Federation of America’s director of investor protection. In response to the criticisms of robos that I wrote about in the above mentioned blog (conflicting sources of revenues, self-dealing, and low standards of client care) she said: “Well, how’s that any different from the rest of the financial services industry?”

With the notable exception of independent RIAs, it isn’t any different. And that’s my point about robo “advisors.” They don’t represent a “new” entry into the financial services industry. They are merely a digital delivery system for the old financial services industry, rife with all of its conflicts and client abuses.

Owning the digital distribution channel is already top of mind at firms like BlackRock, the financial firm which owns the massive ETF provider, iShares. In August 2015, BlackRock announced it was purchasing FutureAdvisor, an aspiring roboadvisor that hadn’t quite reached the AUM of larger competitors, Wealthfront and Betterment.

While BlackRock has made it clear it has no plans to market to individual investors via its new roboadvisory offering, it certainly is planning to move its own iShares products through FutureAdvisor.

Instead the firm hopes to use FutureAdvisor to enable banks, brokerage firms, insurers and 401(k) plans to use the company’s digital platform to serve mass affluent investors and millennials, Frank Porcelli, head of BlackRock’s U.S. wealth advisory unit, said in an interview.

By pivoting FutureAdvisor into a B2B play to other financial institutions that market to the end investor, BlackRock will provide a built-in distribution channel to distribute iShares directly to clients of the wealth managers it services.

Schwab has had some very public early success with its Schwab Intelligent Portfolios (SIP) offering. Schwab just reported that its own competitive product to roboadvisors had grown AUM +37% quarter over quarter. SIP now boasts over $5B in AUM in just 2 quarters of operation. That means shortly Schwab’s AUM will approximate all the assets under management in the entire roboadvisor industry. Some of the criticism of Schwab’s Intelligent Portfolios has centered around the bias that the online broker has towards using its own ETFs.

Regardless of who emerges as the largest competitor in the digital advice space, ETFs are the ultimate winner.

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