Disrupting the Disruptors: RIAs, Online Brokers, and the Challenge to the Automated Investment Advisors

by William Trout, December 1, 2014
Industry Trends
Global, North America

Abstract

The wealth management industry has been relatively sheltered from the digital revolution that is reshaping other areas of financial services, or at least it has appeared to be. But the cost-efficiency and scalability of automated investing platforms, combined with investors’ embrace of digital technology, has forced traditional wealth management firms to respond.

In the report Disrupting the Disruptors: RIAs, Online Brokers, and the Challenge to the Automated Investment Advisors, Celent looks at the accelerating cycle of disruption that characterizes wealth management today, in which traditional, advisor-centric providers are coming under pressure from technology-based market entrants, which in turn prove vulnerable to disintermediation themselves.

Evolution of this sort used to take place over decades; today, disruption is measured in years. Technology has been the driver of change, lowering barriers to entry and expanding the price and servicing options available to investors. These investors include the mass affluent segment and the equally underserved Millennial Generation, whose behavioral characteristics and privileged position as inheritors and generators of assets make them the future of wealth management.

The shift toward a technology-driven means of investing has undercut the role of the advisor and exposed inherent weaknesses in the high-cost model of brokerage houses and registered investment advisors. Looking ahead, however, automated investment advisors will face a more rugged environment defined by tighter margins and competition from online brokerages (in many respects the natural competitors of the automated investment advisors) and institutional players such as Vanguard and Charles Schwab, which have built-in client bases and are better positioned to withstand an eventual market downturn.

“Consolidation, whether the result of a price war or a weaker outlook for equities, will mark the end of what might be called Automated Investing 1.0, an era defined by a shift in market power from advisor to client, ” says William Trout, a senior analyst with Celent’s Securities & Investments practice and author of the report.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

1

Introduction

2

 

Focus of Report

2

The Automated Investment Advisors

4

 

Tracking the Course of Disruption

6

 

If You Can’t Beat ‘Em …

8

 

From Channel to Delivery System

8

Online Brokerage

10

Areas of Competitive Differentiation

12

Build Vs. Buy

15

The Banks and Automated Investing

16

 

Mobile Channels

16

Conclusion

17

Leveraging Celent’s Expertise

18

 

Support for Financial Institutions

18

 

Support for Vendors

18

Related Celent Research

19

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