Fidelity vs. the Robots: The War for Millennials

Fidelity Investments, one of the world's largest investment managers, is being challenged by robo advisors, start-ups focused on digital investment solutions, for the investment business of millennials. In response, Fidelity embraced digitization to remain competitive. Who will win: Fidelity or the robots?

Fidelity Investments, with $2.1 trillion in client assets under management (AUM), has become one of the firms synonymous with the investment management industry.1 One of Fidelity’s core services, retail advisory ($200 billion of AUM), pairs a client with a financial advisor; the advisor assists the client in putting together an optimal portfolio of investments based on the client’s needs. Fidelity’s retail advisory business model is predicated on access to superior investment products coupled with best-in-class financial guidance; Fidelity’s operating model leverages financial advisors to manage the client’s investments. However, a new generation of financial technology startups, dubbed “robo advisors,” have recently emerged and are challenging the premise of Fidelity’s operating model by providing automated investment solutions at a fraction of Fidelity’s cost. While Fidelity’s business model remains intact, the robo advisors have exposed a critical weakness in Fidelity’s operating model (particularly with millennial clients), leading Fidelity to develop its own digital retail advisory offering: Fidelity Go.

While robo advisors are miniscule in AUM relative to Fidelity, the rise of the millennial generation helps to explain why robo advisors pose a threat to traditional investment giants like Fidelity. Per Deloitte, millennials, individuals who were born after 1980 and reached adulthood in the 21st century, are currently the largest of adult segments (approximately 40% of the global population); while millennials presently have limited investable assets, they are expected to enter their peak earning years in the near-term. However, millennials, given their experience during the financial crisis, are wary of financial institutions; yet, 84% of millennials have reported seeking investment advice, signaling a continuing demand for financial advisory services. Not surprisingly, millennials consider technology a critical component of financial advice.2 Given the potential for future wealth creation by millennials, millennial preferences acted as a catalyst for digital innovation in the investment management sector, leading to the emergence of robo advisors.

Robo advisors, such as Betterment and Wealthfront, have leveraged technology to make investing more accessible to the masses. As described by Betterment, a robo advisor “is the automation of every task that’s considered part of good portfolio management…it does the job it was programmed to do: optimize investments, based on quantifiable research…”3 Robo advisors eliminate the role of the human financial advisor, as the investor, based on his or her goals, is placed into one of several pre-designed portfolios—most importantly, these portfolios require no human intervention or management. By eliminating the role of the advisor, robo advisors have significantly driven down the cost to investors: robo advisor fees range between 0.15-0.35% of AUM versus 1% of AUM for traditional investment managers.4 Based on experience to-date, researchers project that the robo advisory industry will “grow to at least $255 billion in managed assets over the next 5 years – up from $14 billion in 2014.” Not one to miss out on a major opportunity, Fidelity made the decision to challenge robo advisors at their own game.

In July 2016, Fidelity launched “Fidelity Go,” which was billed as “an advisory solution for digital first investors.”5 As the description suggests, Fidelity acknowledged the importance of a digital operating model to stay (or to become) relevant to millennials.6 As such, Fidelity Go emerged as a digital-first and low-cost (0.35% of AUM) investment solution for millennials: a direct competitor to the robo advisors. Like other robo advisors, Fidelity Go places clients into pre-designed portfolios based on the client’s goals. However, Fidelity, importantly, notes that its portfolios are constructed, monitored and rebalanced by investment professionals, not an algorithm; by doing so, Fidelity is leveraging its core investment capabilities to differentiate its offering relative to that of other robo advisors.

As Fidelity Go only launched in July, it is too soon to evaluate the success of Fidelity’s digital operating model. However, as one of the largest investment managers, Fidelity could have chosen to ignore the robo advisor trend and continued to focus on its core business model; yet, Fidelity instead chose to embrace digitization as a means to remain competitive with a new generation of potential clients. As robo advisors and their venture capital backers are waging a war of innovation, Fidelity will need to continue to invest in its digital platform to stay competitive. Further, Fidelity needs to win mindshare with millennials, promoting its brand above that of other robo advisors. While the robo advisors may have a first mover advantage, Fidelity appears determined to win the war for millennials. (731 Words)

  1. Fidelity Investments, “About Fidelity,” https://www.fidelity.com/about-fidelity/overview”, accessed November 2016.
  2. Daniel Kobler, “Millennials and Wealth Management: Trends and Challenges of the New Client,” Inside (Deloitte), June 2015.
  3. Betterment, “What is a Robo Advisor,” https://www.betterment.com/resources/personal-finance/goals-and-advice/what-is-a-roboadvisor/, accessed November 2016.
  4. Falguni Desai, “The Great FinTech Robo Advisor Race,” http://www.forbes.com/sites/falgunidesai/2016/07/31/the-great-fintech-robo-adviser-race/#70b451f43812, accessed November 2016.
  5. Fidelity Investments, “Fidelity® Launches Fidelity Go: An Advisory Solution for “Digital First” Investors,” July 27, 2016, https://www.fidelity.com/about-fidelity/individual-investing/fidelity-launches-fidelity-go, accessed November 2016.
  6. Theresa Carey, “Fidelity Launches Robo-Advisor,” http://www.barrons.com/articles/fidelity-launches-robo-advisor-e-trade-buys-optionshouse-1470459728, accessed November 2016.

Previous:

KUVO – Connecting The Global Dance Music Industry

Next:

John Lewis: the omni-channel integration leader in the UK

6 thoughts on “Fidelity vs. the Robots: The War for Millennials

  1. Great article; really enjoyed. A few questions arise however – some of which, admittedly because I may just be ignorant on some of the products. For one question though, is there a concern that if these robo advisers reach critical mass in retail investors, that there’s a possibility markets could lose efficiency? For eg., I imagine millennials have relatively similar amongst them, and thus, is it likely that most of the robo produced portfolios are always going to suggest the same equities? And thus, either over-buying particular stocks? Maybe this is simply not a concern given the amount of money that would be deployed, but interesting to think about.

  2. Austin, that’s a great question. This impact is well-documented with index funds where dramatic price movements in certain stocks can occur when index funds reallocate funds or when a certain equity is added or removed from an index. You may be interested in this discussion of the impact on the economy in general: http://www.newyorker.com/business/currency/is-passive-investment-actively-hurting-the-economy

    To build on Austin’s question, I wonder what the actual difference is between Fidelity Go and some of Fidelity’s other retail investment offerings. It seems like Fidelity Go is simply a set of off-the-shelf portfolios designed by investment professionals (humans) that are chosen based on inputs from a client. This doesn’t seem to be the same approach that Betterment and Wealthfront are taking. At least, it seems like there is a higher human component in Fidelity Go and from the article, it seems like they believe this to be their advantage. In which case, I wonder how this is truly robo-advising versus automated portfolio allocation based on pre-determined portfolio rules that are periodically updated by human beings.

    I find these types of companies and changes very interesting because it goes back to the age-old question of how do you beat the market? My personal stance is that returns over time are always linked to the fundamentals of a business. There are many ways to access these returns and I believe robo-advising has a place for some people but not everyone.

  3. Great article – and before even getting to the comments section, I was wondering about the points Austin and Andrew both brought up. Specifically, does a mass movement to these robot managers actually make Fidelity that much more appealing to the savvy investors (and frankly, probably the investors who may be investing more money/generating disproportionate AUM)? By total analogy, if I’m the New York Yankees, am I actually concerned about losing fan revenue if a bunch of subpar teams are injected into the Major Leagues? Or is it, in the long term, actually better off for my interests to have a weak comparison point?

  4. Great article, and I think to answer Austin’s and Andrew’s questions, I think the value in investing with robo-advisors or some sort of automated wealth management system is the fact that they will automatically re-balance your portfolio according to modern theory of portfolio allocation. Based on one’s risk tolerance and preferences, theoretically there are certain allocation strategies that an investor should pursue given a set of assumptions that include investment horizon, dividend payouts, risk / reward preferences, etc. Where I can see Fidelity playing in this kind of passive management strategy, and I think the reason for them still using real advisors, is that there is a certain sub-segment of millenials who have capital in various forms (and not necessarily all in Fidelity accounts) that they also want to take into consideration when thinking about investing. Real advisors are able to take things like this into considerations, whereas it would be a lot harder for a robo-advisor to do so.

  5. Interesting article! You pointed out the level of distrust for financial institutions held by millennials – how do you think that will play into this? My concern with traditional institutions, such as Fidelity, entering this space is that while the offering will be competitive with that of a fintech startup, the fact that it comes from a traditional institution may be a limiting factor with the target consumer. On the other hand, it may be that finances are too important to put in the hands of a new company, and even though millennials are wary of traditional financial institutions, they may be the best of a set of bad options.

  6. Great article. I think it will be very interesting to see how Betterment and Wealthfront compete as the big banks enter into their space. I do think it will be hard for these startups to compete as they have much less money, less of a differentiated product, and less of a competitive edge. To be honest, Betterment really doesn’t offer anything much different than an index fund does, except the index fund charges lower fees. I wonder if Betterment, etc. will feel a pressure to add in more offerings, even human based offerings, to keep up with the likes of Fidelity. We might actually see a slight de-digitization in these companies to compete.

Leave a comment