Wall Street's trillion dollar money managers are under threat from a new breed of low-cost advisers

Banks' wealth management by AUMGoldman SachsThree investment banks dominate the wealth management space — but several startups could disrupt that

UBS, Bank of America, and Morgan Stanley stand out in the global wealth management industry, each responsible for handling more than $US1 trillion in investors’ assets.

But they’re now under siege from well-funded startups that offer a wide array of advisory services at a low cost thanks to broad use of automated functions.

These are the rob-advisors.

We’re only in the first inning of the wealth management wars, but this business that has historically been dominated by well-staffed big banks and a network of good-old-boy relationships is seeing its competitive landscape evolve rapidly.

While these old school firms continue to draw multi-million dollar clients, the robo-advisors have attracted HENRY (that’s “High Earning, Not Rich Yet”) clients, a new Goldman Sachs report says.

Betterment, Wealthfront, FutureAdvisor and Personal Capital are among these new firms.

Some big banks and investors are betting on the robo-advisors

Many of these startups are actually backed by the competitors to Wall Street’s incumbents in the wealth management space. Citi Ventures is among the backers that have contributed more than $US100 million to Betterment, and Personal Capital counts both USAA and BlackRock among its investors.

How startups in the wealth management arena differentiate themselves, particularly with new ‘HENRY’ millennials, is through automated advising. According to Goldman, “viral customer acquisition strategies” to capitalise on target clients’ tendency to tap into their social network to generate investing ideas. They’re also doing it with lower fees than the big incumbents.

Fees charged by digital wealth managersGoldman SachsOne advantage smaller startups have over banks is their ability and willingness to charge lower fees

In the short run, it’s meant to get more millennials onto wealth management platforms earlier. In the long run, it aims to keep them engaged as they grow older, and need to manage more cash — by that point, startups are aiming to have scaled up client services to better compete with the bigger players.

The fees are key to big banks and other fund managers. Bank of America’s Merrill Lynch unit is responsible for a double-digit portion of the bank’s top line. It’s even more meaningful for other fund managers, like Charles Schwab.

Another big advantage startups enjoy is their low investment minimums: between $US0 and $US100,000 (with Personal Capital being the highest). They need less in fees, to pay a smaller staff, and lower fees also lets startups scale up faster with smaller investors.

One Wall St. source notes that banks’ wealth management operations offer services that most startups cannot, yet: estate planning and a broader range of investment options.

“The robo-advisors work for middle class, or young people, who don’t have much and just need to avoid fees,” one Wall St. pro points out. “They can’t replace full-service advisors.”

Still, the Wall St. incumbents aren’t just sitting there. Competitors to the new class of wealth management firms have clearly taken note of the ‘HENRY’ trend: earlier this month, fund manager Charles Schwab launched its Intelligent Portfolios platform, promoting lower fees through automated technology.

Again, we’re only in the first inning of the wealth management wars.

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