By Andrew Welsch
At first glance, Vanguard and Robinhood don't appear to have much in common. The former is a decades-old asset manager known for its low-cost index funds, while the latter is a brokerage app that pioneered zero-commission trading and rode the meme-stock frenzy.
Yet both companies have been low-cost disruptors in their respective sectors, and now, they're expanding further into the same realm: wealth management.
Robinhood is buying TradePMR, a custodian for independent financial advisors, and is preparing to launch an AI-powered financial advice offering next year. Vanguard, meanwhile, created a new advice and wealth management division and hired former Fidelity executive Joanna Rotenberg to lead it.
For Robinhood, wealth management is a new business, while Vanguard's moves suggest it is putting renewed emphasis on growing an existing enterprise. In both cases, they join a plethora of banks, brokerages, asset managers, and private-equity firms keen to find ways to make money by helping investors manage their money. They have good reasons to do so. Wealth management is attractive because it generates steady returns, has been benefiting from demographic tailwinds, and has customers who tend to stick around.
"It's a huge addressable market, roughly $30 trillion dollars in the U.S.," says Devin Ryan, analyst at Citizens JMP. "It's a noncommoditized part of financial services whereas so many other areas have been commoditized and face fee pressures. It's also a way to compete for a higher percentage of the customer's wallet. And you have the ability to stay with the client through their life cycle as their needs become more complex and varied."
At this point, Wall Street's love affair with the financial advice business has lasted for years. It's been quite successful for some firms and a redoubt of safety after trying times. When Morgan Stanley rebuilt itself after the financial crisis, CEO James Gorman made wealth management a cornerstone of the company by buying Smith Barney and acquiring thousands of financial advisors. Gorman also added to the wealth unit by acquiring online brokerage E*Trade in 2020, and today the company is one of the nation's largest wealth managers with about $6 trillion trillion in assets. The company's wealth unit generated almost half of its $15 billion in third-quarter revenue.
Other banks, from JPMorgan Chase to Bank of America, have emphasized wealth management. The sector's allure has drawn in other players too. For example, private-equity firms are buying registered investment advisors and rolling them up into larger enterprises. The day when one of them goes public might not be far off.
Not coincidentally, wealth management's appeal has increased as other areas of financial services feel acute fee pressures. Financial advisors typically charge a 1% fee based on assets. That expense hasn't budged in years, despite numerous warnings that it would shrink. Meanwhile, fees on funds have plunged in large part because of pressure from Vanguard. Commissions on trades fell for years and have now basically vanished.
"Charles Schwab did the first round of that back in the 1970s and 1980s, and then Robinhood helped kill commissions on trades," says David Goldstone, manager of research at Condor Capital Wealth Management. "It's now zero. So that's a big piece of it as well. Fees have come down, and firms are looking for ways to add value for customers and increase revenue."
While advisors' fees haven't changed much, their profession has. They once focused on picking stocks and executing trades. Now, they provide comprehensive financial planning and, for wealthier clients, bespoke estate and trust planning.
"People don't frequently change their financial advisor," Goldstone says. "It's an important relationship in a person's life. Switching from trading on Schwab to trading on Robinhood is not that big of a hurdle. Switching your financial advisor -- that is a much bigger jump."
The shift toward holistic advice came as millions of baby boomers got older, accumulated assets, and needed help planning their retirements. Now, firms are jockeying to position themselves for the next big demographic shift: the multitrillion inheritance that baby boomers are expected to leave to their children and grandchildren.
Demographics is a topic Robinhood executives bring up repeatedly when talking about their ambitions in wealth management. Seventy-percent of Robinhood's 25 million customers are millennials or Gen Zers. Although Robinhood's average customer account size is just $6,500, its investors have years of asset accumulation ahead of themselves and may one day inherit some of mom and dad's money.
"Robinhood can really help grow the pie in the same way it did with trading where it brought in many first-time investors," Ryan says. "I think they could do the same thing here with financial advice."
Robinhood says it will create a referral program to connect customers who want advice with advisors who custody assets with the custodian it is buying, TradePMR. At the same time, Robinhood has plans to debut an AI-powered financial advice offering that will presumably be low cost and aimed at investors with small sums to invest.
Where Robinhood is starting from scratch, Vanguard is building off its existing wealth management offerings. The Malvern, Pa.-based company's recent moves suggest it wants to win more clients and assets. In September, it slashed the minimum on its digital robo-advisor to just $100 from $3,000. The company also has one of the industry's largest hybrid robo-advisors, Vanguard Personal Advisor, which offers customers access to human financial planners. Both services charge low fees of 0.15% and 0.3%, respectively.
Goldstone thinks Vanguard and Robinhood have a shot at converting existing DIY investors into digital advice clients. "A lot of self-directed investors are not self-directed investors because they love being self-directed," he says. "They either are doing it because they don't want to pay the fees associated with traditional advice or they don't meet the asset minimums."
Of course, finding success in wealth management is easier said than done. Some of the factors that make it such an appealing business to be in -- for example, "sticky" clients -- can present hurdles to growth. If your clients rarely leave, the same may be true for your competitors. Organic growth is hard. Recruiting individual advisors with existing client rosters is too piecemeal of an approach to really move the needle for most firms. That's why acquisitions remain a go-to growth strategy for many companies.
Some firms are also struggling with how to serve different client segments and price them accordingly. "Playing upmarket is a bit easier because if you start from a position of scale, you just add additional expertise and talent," says Alois Pirker, founder of consulting firm Pirker Partners. "Going downmarket can be a bit more challenging."
That said, Robinhood and Vanguard have some advantages as they strive to expand their wealth management businesses. Both have recognizable brands and huge existing customer bases. The former's technology, particularly its app, is well-liked by many investors. That's no small matter in an increasingly tech-heavy world. Both also have histories of disrupting legacy industries and lowering costs. Whether history repeats itself in wealth management remains to be seen.
Write to Andrew Welsch at andrew.welsch@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 11, 2024 16:23 ET (21:23 GMT)
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