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ROBO-ADVISORS 2.0 How Automated Investing is Infiltrating the Wealth Management Industry

March 2015

MyPrivateBanking Report 2nd edition

Report Extract Original Report with 201

pages plus comprehensive data appendix

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CONTENTS TABLE OF CHARTS 5

1.0 EXECUTIVE SUMMARY 7

2.0 METHODOLOGY 13

3.0 ROBO-ADVISOR SERVICES: REPORT FOCUS 16 3.1 THE ROBO-ADVISOR PHENOMENON 26 3.2 THE ESSENCE OF ROBO-ADVISORY SERVICES 19 3.3 ROBO-ADVISOR CLIENT INTERFACES AND TOOLS 22 3.4 NEW DEVELOPMENTS IN ROBO-ADVISING 23 3.5 FURTHER TECHNOLOGY DISRUPTION 26

4.0 ROBO-ADVISOR SERVICES AND TECHNOLOGY: STRATEGIC IMPLICATIONS FOR WEALTH MANAGEMENT 27 4.1 ROBO-ADVISOR MARKET SIZE AND GROWTH ON A GLOBAL SCALE 27 4.2 THE SEEDS OF THE DIGITAL ADVISORY SERVICES TREND 29 4.3 GAUGING THE IMPACT OF ROBO-ADVISORS 30 4.4 HOW ROBO-ADVISORS THEMSELVES SEE THEIR INDUSTRY 32 4.5 HOW ROBO CHALLENGERS AND THE CHALLENGED SEE THE SITUATION 36 4.6 THE ROBO-ADVISORS’ APPROACH TO INVESTMENT 37 4.7 THE ROBO-ADVISOR CHALLENGE - CONCLUSIONS 44

5.0 ROBO-ADVISORS – STRATEGIC RELATIONSHIPS AS A FACTOR IN WEALTH MANAGEMENT DISRUPTION 49

5.1 STRATEGIC DISRUPTION’S GLOBAL PERSPECTIVE 50 5.2 THE OUTLOOK FOR ROBO-ADVISORS IN EUROPE 53

6.0 ROBO-ADVISORS – SUMMARY OF FINDINGS 55 6.1 KEY FUNCTIONS COVERED BY ROBO-ADVISORS 56 6.2 ROBO-ADVISOR CHARACTERISTICS 60 6.3 PROVISION OF MOBILE APPLICATIONS 65 6.4 ROBO-ADVISOR WEBSITES 66 6.5 ROBO-ADVISOR APPROACHES TO RISK TOLERANCE 69

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7.0 PROFILES: EXISTING ROBO-ADVISORS, REVIEW AND ASSESSMENT 70

7.1 ASSETBUILDER 70 7.2 BETTERMENT 74 7.3 FUTUREADVISOR 78 7.4 MONEYFARM 82 7.5 MONEY ON TOAST 86 7.6 NUTMEG 89 7.7 PERSONAL CAPITAL 93 7.8 QUIRION 97 7.9 REBALANCE IRA 101 7.10 SWISSQUOTE EPRIVATE BANKING 104 7.11 VAAMO 107 7.12 WEALTHFRONT 111 7.13 WISEBANYAN 115

8.0 PROFILES: ROBO-ADVISORY SERVICES COVERED FOR THE FIRST TIME IN THIS REPORT 118

8.1 8 NOW! 118 8.2 FINANCESCOUT 24 (FINANCESCOUT 24 MANAGED DEPOT) 122 8.3 LEARNVEST 126 8.4 STOCKSPOT 131 8.5 TRUE WEALTH 135 8.6 WEALTHSIMPLE 139

9.0 PROFILES: ESTABLISHED WEALTH MANAGERS WITH A ROBO- ADVISOR/AUTOMATED SERVICE 142

9.1 BMO INVESTORLINE, ADVICEDIRECT 142 9.2 FIDELITY INSTITUTIONAL WEALTH SERVICES 146 9.3 RITHOLZ WEALTH MANAGEMENT – LIFTOFF 149 9.4 CHARLES SCHWAB, SCHWAB INTELLIGENT PORTFOLIOS 151 9.5 TD AMERITRADE INSTITUTIONAL 155 9.6 VANGUARD PERSONAL ADVISOR SERVICES 158

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10.0 PROFILES: TECHNOLOGY PROVIDERS 161 10.1 ADVIZR 161 10.2 IQUANTIFI 165 10.3 JEMSTEP ADVISOR PRO 169 10.4 NARRATIVE SCIENCE 174 10.5 RISKALYZE 177 10.6 UPSIDE 182 10.7 YSEOP 185

11.0 BEST PRACTICES 189

ASSETBUILDER – A SELF-ASSESSMENT TOOL THAT PROSPECTS CAN REALLY PLAY AROUND WITH 189

XXX – HELPING PROSPECTS TO GET TO KNOW YOU WITH TEAM MEMBER INSTRUCTIONS 190

XXX – ‘MUST READS’, GREAT EDUCATION AND INFORMATION WEBPAGES 191

XXX – A REALLY THOROUGH ASSESSMENT OF RISK TOLERANCE 192

XXX – AN OPEN AND FRANK APPROACH TO PORTFOLIO PERFORMANCE 193

XXX – A TRULY POWERFUL ACCOUNT AGGREGATION FUNCTION 194

XXX – ALSO A STAR WHEN IT COMES TO PERFORMANCE REPORTING 195

XXX – OFFERING CONTENT THAT REALLY GUIDES FINANCIAL BEHAVIORS 196

XXX – AN ENTICING TEST DRIVE 197

XXX – A USER GUIDE THAT CAPTURES EVERYTHING AND A CLIENT MAGAZINE 198

XXX – KEEPING CLIENTS UPDATED VIA THE XXX MOBILE APP 199

12.0 AUTHORS 200

13.0 DISCLAIMER 201

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TABLE OF CHARTS Chart: Assets under Management Robo Advisors Worldwide 28

Betterment advertising on cabs in New York City and San Francisco 31

The Savings Plan Calculator on the DeAWM UK/Retail web-page 53

Chart: Average Assets under Management per Client 61

The AssetBuilder tool 71

The Betterment tool 76

The FutureAdvisor tool 80

Making the point that service providers’ gain can be the client’s loss 84

Explaining the importance of diversification in the ‘How we Invest’ section of the Nutmeg

website 90

Personal Capital’s recently improved asset allocation recommendations for users of its

financial software 94

The Quirion tool 98

The Vaamo tool 108

The 8 Now! tool 119

FinanceScout’s choice of risk-averse, defensive, conservative, balanced, growth and

‘opportunity’ portfolios 123

Rebalancing as explained on the FinanceScout 24 website 124

The LearnVest tool 127

The Stockspot tool 132

The 3rd stage of the 10 stage True Wealth Risk Assessment questionnaire 136

The interactive Portfolio Characteristics screen 137

The BMO InvestorLine tool 142

The BMO InvestorLine Trade tool 143

The Fidelity tool 148

The Ritholtz Wealth Management tool 150

The Charles Schwab personal portfolio dashboard 152

From the ‘About SIP’ document published by Charles Schwab in late February 2015 153

The Veo Open Access dashboard 155

The Vanguard Personal Advisor ServicesTM 158

The Advizr retirement planning tool 163

The iQuantifi goal-based financial planning tool 168

The Jemstep account analytics 171

The Riskalyze tool 179

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The Riskalyze Risk Number approach 180

The Upside retirement plan 183

The Yseop Executive Summary Demonstration 186

XXX’s flexible assessment tool 189

The XXX Team page 190

XXX’s ‘Must Read’ website section 191

XXX portfolio performance 193

XXX’s portfolio performance chart 195

One of XXX’s behavior-shaping video blog posts 196

XXX demo portfolio recommendations and simulations 197

Portfolio performance on the XXX app 199

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EXTRACT OF EXECUTIVE SUMMARY (Executive Summary in full report)

Robo-Advisors Infiltrating Wealth Management Industry

The disruptive effects of robo-advisors and automated investment services to the traditional wealth management industry are growing. Whereas the market development in 2014 was dominated by the launch and growth of start-ups, established wealth management providers have started to strike back and are opening up to the robo-trend themselves. This is a key finding of our 2015 report on robo-advisors "Robo-Advsiors 2.0.: Robo-Advisors Infiltrating Wealth Management Industry".

Transformation from robo-advisor 1.0 to robo-advisor 2.0.

Compared to our last year’s survey we find that the robo-advisor movement has been growing up and the report identifies three main trends shaping the development in the robo-advisor industry:

□ The (established) wealth management industry as a whole is opening up to the robo-trend as signified most prominently by the new offering by Schwab Intelligent Portfolios. But other banks and wealth managers have already created their own automated advice solutions such as BMO, Vanguard, Ritholtz, Fidelity and TD Ameritrade.

□ Some robo-advisors are acting more and more as technology providers, offering white label solutions and software platforms to other advisors or are seeking alliances with established wealth management players. The deal between Fidelity and Betterment is only one, broadly reported example.

□ There are increasing opportunities to supplement robo-services with other, adjacent newly automated services such as financial planning. For example new players like Advizr and iQuantifi now provide algorithmically based planning solutions while LearnVest has harnessed technology to provide a highly cost effective hybrid human and automated planning solution.

We see a growing awareness on the part of conventional wealth managers of the need to respond to the challenge that robo-advisors present. A number of important and influential players in the financial services industry begin to engage with the kinds of technology that were seen as the identifying characteristic of robo-advisors exclusively less than a year ago. And this is just the beginning of a significant trend for the next few years.

In its updated forecast MyPrivateBanking Research estimates that global assets under management (AuM) of the robo-advisor services will reach $20 billion by the end of 2015. The lion’s share of these assets of 79% will be managed by robo-advisors based in the United States. Within the five following years the global AuM of robo-advisors is forecast to grow to an estimated $450 billion (2020). This number does not even include assets which are invested under the recommendations of an automated financial advisor but controlled by private investors and the assets under management of existing established wealth managers offering some kind of robo-like or automated service.

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Robo-Advisors accelerate technology adoption in wealth management

MyPrivateBanking has identified a number of likely developments that will mean that robo-advisors may soon have influence on the development of traditional wealth managers which goes significantly beyond their current small size:

□ Robo-advisors are likely to integrate more technology rapidly, especially in areas such as the effective deployment of mobile apps and harnessing artificial intelligence for client communication and established wealth managers will need to respond quickly.

□ The trend for robo-advisors to move into the provision of business-to-business services to other wealth managers grows. Working together with a robo-advisor in this way could provide important competitive advantages to wealth managers that take advantage of these opportunities.

□ Robo-advisors’ websites benefit from focus and simplicity and they have to be very careful not to over-complicate the initial impact their websites make on the first time visitor; this may act as a brake on offering more services (such as financial planning).

□ Some robo-advisors and established wealth management institutions, such as Vanguard, BMO or Schwab, are already including an element of dedicated (but remote) advisor contact and this could in time become a serious threat to “old-school” wealth manager business models.

The robo-advisor phenomenon will force the traditional wealth management industry to reconsider the generally accepted belief that wealth clients will always prefer the face-to-face contact of their own dedicated personal advisor. Now we are beginning to see newly applied technology, such as financial planning tools and natural language generation engines, which have the potential to provide practical automated substitutes to personal contact with an advisor.

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2.0 METHODOLOGY This report covers 19 robo-advisors (of which 13 have already been covered in our previous report in September 2014) with detailed profiles. In addition, there are six profiles of automated wealth management services by established wealth management firms and seven profiles of technology vendors that provide specific technology solutions for the robo-advisor-space or complete white label robo-advisor solutions.

In MyPrivateBanking’s 2014 report on robo-advisors, Robo-Advisors: Threats and Opportunities for the Global Wealth Management Industry, we reported on 14 of the active robo-advisors in the United States and Europe. For the current report, recent developments in the automated advisory field convinced us that it was vital to include three additional perspectives on the field: technology advances that are opening up new territory for digital advice, new robo-advisor solutions and moves by major players in the financial services industry to introduce their own robo-advisory services or initiatives that represent an implicit response to robo-advisors. We have also taken the opportunity to review and update our earlier findings about 13 of the original 14 robo-advisors as in several cases their recent development provides essential pointers to the future direction that automated advisory services will track.

(… more in full report)

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3.0 ROBO-ADVISOR SERVICES: REPORT FOCUS

In this chapter we set out our main areas of interest in looking at three types of participant in the financial advisory field. Firstly, we look at the robo-advisors themselves, both the players we covered in our 2014 report and at a group of new entrants or companies that launched their service in the last few years and which we believe have become more central in the robo-advisory terms in recent months. Secondly, we’ll set out in general terms our reasons for being interested in two other categories of participant: companies – usually but not always major financial institutions – that have an important part to play in the future of robo-advisory services; and companies that are technology or, to put it another way, robo functionality vendors.

Our major focus in our ongoing research into robo-advisors is to establish their position in relation to the wealth management industry in general and to identify ways in which robo-advisors are likely to have an impact on conventional wealth management businesses. This covers not just possible threats and their likely timescales but, very importantly, also the extent to which the robo model is replicable by more traditional wealth managers. We have also made the continuing developments in automation that have the potential to further disrupt wealth management a major focus of this report.

(… more in full report)

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12.0 AUTHORS

Francis Groves, Senior Analyst, is a senior analyst for the research on vendors, mobile apps and online services. His specific research interest is communication and understanding in relation to finance topics and investor motivation. He has over 30 years of experience in the field of online business information, having worked for Reuters, the Financial Times and LexisNexis. Francis speaks at conferences and events and has published several books and articles. Among them 'Corporate Actions, A Concise Guide' and 'Exchange Traded Funds, A Concise Guide to ETFs'. Francis has a degree in History, which he studied at the London School of Economics.

Steffen Binder, Research Director and co-founder of MyPrivateBanking Research. Steffen is Head of Research and oversees the research agenda and analyst teams. He is responsible for creating and developing powerful concepts and relevant content to help our clients navigate a rapidly changing digital environment. As a regular speaker at finance and technology industry events around the globe, Steffen is frequently quoted by leading business media such as the Wall Street Journal, Handelsblatt and the Financial Times. Prior to this, Steffen was Managing Director of Forrester Germany, Switzerland and Austria. He came to Forrester through its acquisition of Forit GmbH, a leading European

technology research company, of which he was also a co-founder. Prior to that, Steffen was a partner at Monitor Company (Strategy Consulting). He holds Master’s Degrees in Organizational Behavior from Rutgers University (USA) and in Public Administration from the University of Konstanz (Germany).

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13.0 DISCLAIMER IMPORTANT NOTICE AND DISCLAIMERS:

No Investment Advice

This report is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This report is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. The price and value of securities referred to in this report will fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of all of the original capital invested in a security discussed in this report may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.

Disclaimers

There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth in this report. MyPrivateBanking GmbH will not be liable to you or anyone else for any loss or injury resulting directly or indirectly from the use of the information contained in this report, caused in whole or in part by its negligence in compiling, interpreting, reporting or delivering the content in this report.

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