Tom Bradley, the former TD Ameritrade Institutional chief who has spent the last three years running the discount broker’s retail arm, declares he is “flabbergasted” at the industry’s present obsession with robo-advisors.
Bradley spoke today after participating on a panel on the topic at Tiburon CEO Summit featuring the CEOs of Betterment, Next Capital and Sig Fig. “Some robo-advisors have nice [website] presentations but they can be easily replicated,” Bradley said.
In his view. the emergence of robo-advisors is very similar to the appearance of online banking services in the late 1990s. “Online banking was going to put bank branches out of businesses,” he noted.
Needless to say, that never happened. “Some online banks survived, some were bought and others failed,” Bradley said. “Today, all big banks do online banking, but people still want to walk into a bank branch.”
Another comparison he cites was the launch of Financial Engines, the original robo advisor, in 1994. That company struggled for a decade as a business-to-consumer platform before finding a market for its services in the business-to-business 401(k) universe.
Bradley thinks the sparse, simple portfolios robo-advisors offer featuring five to seven ETFs may satisfy some of the smallest investors with $10,000 or less to invest, but these model portfolios are going to have no choice but to become more complex as clients accumulate more assets. Otherwise, the robo business model won’t be sustainable.
“Increased diversification improves the efficient frontier,” he said. “How long will they pay 30 basis points for 5 ETFs?”
In contrast to other custodians, most notably Schwab, TD has yet to enter the robo space. That doesn't mean it won't. “We are always looking at ways to improve the overall client experience which includes maintaining a best in class technology offering," Bradley says. "We may adopt some of the newer technologies we are seeing but our focus is on providing an omni-channel experience with a human element – that’s what works for our clients.”
Discount brokers such as TD, Fidelity and Schwab already offer numerous services to do-it-yourself investors who don’t want to work with an advisor. In recent years, TD’s Amerivest managed account platform for retail investors has enjoyed asset growth from $2 billion to $11 billion. The average fee on an Amerivest account is 80 basis points, though it can vary depending on the size and complexity of the portfolio.
But Bradley says Amerivest only took off after TD got investment consultants from its retail unit involved in the operation. “Managed accounts are still sold, not bought,” he said.
Moreover, the $11 billion in total Amerivest assets pales in comparison to the $30 billion a year in assets that TD’s retail arm referred to RIAs last year. Bradley isn’t predicting that robo-advisors will go the way of buggy whips or CB radios. However, he doesn’t think they will occupy a position of outsized significance on the spectrum of financial services that many financial industry executives are convinced these upstarts will. It won’t “cause the demise of online brokers, wirehouses or RIAs,” he argued.
In the RIA world where Bradley spent a decade running TD’s institutional business, he doesn’t see robos forcing fee compression. He cited Tiburon research showing that the average RIAs’ fee actually ticked up last year from 99 to 103 basis points.
Unlike Schwab, which has rolled out its own robo platform under the moniker Schwab Intelligent Portfolios that charges investors nothing but uses proprietary ETFs and other vehicles for which Schwab receives fees, TD has yet to enter the robo space. Fidelity has taken a different tact, partnering with Betterment, one of the more successful robo players.
Bradley believes these vehicles should be viewed with some perspective. "Betterment charges 25 basis points on $2 billion in assets. That's $5 million in revenues," he said. "Schwab, Fidelity and TD spend $1 billion in marketing combined."