Retail trading and wealth management have seen significant changes as a result of digital transformation. Among these, the emergence of robo-advisory platforms has been among the most notable developments. Robo-advisory platforms use algorithms to provide automated investment advice and management services (asset allocation, portfolio rebalancing, and other related services) based on clients’ investment goals and risk tolerance. Most use either low-cost exchange-traded funds (ETFs) or index funds as investment vehicles.
Apart from robo-advisory services, online trading platforms have also emerged as a tool for investors to trade various securities such as stocks, ETFs, and options directly via digital platforms, luring investors with commission-free trading facilities. While robo-advisors offer investors a passive form of investing, online trading platforms enable investors to actively engage in day-to-day trading activities.
The retail trading industry comprises robo-advisors, online trading platforms, and digital infrastructure providers. Among robo-advisors, the industry is further split into three segments, based on their product offering (hybrid vs. digital) and target market.
Robo-advisors that offer hybrid services to consumers contribute to the bulk of companies in the industry and include established players such as Wealthsimple, Betterment, and Scalable Capital. This segment also hosts several incumbents such as Vanguard, Charles Schwab, and Wells Fargo. Robo-advisors that are digital pure players include the likes of M1 Finance, Acorns, and Wealthfront, while those that offer B2B services are limited and include a few companies such as Guideline and Blooom.
Online trading platforms mainly focus on directly offering trading options to consumers and include established players such as Robinhood and Webull. Players in the space have also branched out to offer cryptocurrency trading and banking services.
The incumbents include financial institutions such as asset management companies, brokerages, advisory firms, and banks. Most provide digital services primarily to accommodate demand for low-cost advisory services from existing clients and sophisticated investors. The incumbents generally charge slightly higher fees than the disruptors (e.g. 0.30% vs. 0.25%) and require higher minimum balances for standard services.
The incumbents have mainly participated in the industry through in-house developments, acquisitions, and partnerships, with the major players commonly developing their own proprietary platforms. With advances in technology, companies have scaled rapidly to dominant positions.
Some players made their entrance into the industry marked via acquisitions and partnerships designed to capture market share faster. One of the earliest through this avenue was BlackRock, via the acquisition of robo-advisory startup FutureAdvisor in 2015. More notable recent examples include Goldman Sachs when it acquired United Capital in May 2019 and Empower Retirement when it acquired Personal Capital in June 2020.
Many large incumbents have branched out to develop both robo-advisory services and online trading platforms. Morgan Stanley, for instance, developed and launched its own robo-advisory service “Access Investing” in 2017. In 2020, the company entered the online trading space by acquiring E*Trade Financial Corporation.