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)
- Fidelity Investments, “About Fidelity,” https://www.fidelity.com/about-fidelity/overview”, accessed November 2016.
- Daniel Kobler, “Millennials and Wealth Management: Trends and Challenges of the New Client,” Inside (Deloitte), June 2015.
- Betterment, “What is a Robo Advisor,” https://www.betterment.com/resources/personal-finance/goals-and-advice/what-is-a-roboadvisor/, accessed November 2016.
- 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.
- 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.
- Theresa Carey, “Fidelity Launches Robo-Advisor,” http://www.barrons.com/articles/fidelity-launches-robo-advisor-e-trade-buys-optionshouse-1470459728, accessed November 2016.