Robo-Advisors And The Rise Of Model Marketplace
In recent years, we’ve witnessed the rise of the “robo-advisor”, which threatened (at least in their own words) to replace human financial advisors with automation tools that facilitate the implementation of a (usually passive strategic) asset-allocated diversified portfolio, matched to the client’s particular goals and time horizon.
In reality, though, robo-advisors have struggled to gain market share and watched their growth rates lag in recent years, due to a struggle to attract assets and actually gain market share with the technology they’d built, given the hyper-competitive marketplace for asset management and the incredibly high client acquisition costs it entails. In other words, robo-advisors created an efficient operational solution (digital onboarding and automated trading and rebalancing tools to manage model portfolios) to what is ultimately a distribution problem (how to get your particular managed account solution into the hands of consumers?).
But that doesn’t mean the robo technology itself, as a tool that automates both onboarding, and more importantly the trading, rebalancing, and the management of models, isn’t valuable. For instance, several years ago on this blog I wrote:
“Robo-advisor software as a “trading” tool creates the potential for investors (and/or their advisors) to implement and self-automate their own tilts, filters, screens, trading algorithms, and rules-based investment strategies. Popular strategies (e.g., various forms of smart beta?) could be licensed directly through the platform, allowing any investor to have access to the “strategy” of an investment manager, implemented automatically on their behalf. Or alternatively, investors (or their advisors) could create any number of their own investment strategies as well, and then allow the software to automate their implementation.”
And in just the past month, this exact prediction has begun to play out. First it began at the TD Ameritrade National LINC conference, with the RIA custodian announcing the creation of a new iRebal “Model Marketplace”, where advisors will be able to directly access third-party investment management strategies by having their models uploaded directly into the iRebal trading software for the advisor to implement themselves. Then at the Technology Tools for Today (T3) Advisor Technology Conference this month, Riskalyze announced that its robo-advisor-for-advisors Autopilot platform was launching a “Partner Store” that would allow advisors to use its new trading and rebalancing tools to directly implement the models from a series of third-party investment managers. And then at the same conference, Orion Advisor Services announced the launch of Eclipse, which embedded in its own version of a newly launched trading and rebalancing software platform will include “Eclipse Communities”, where advisors can share their investment models for implementation with other advisors… in a form of (peer-to-peer) model marketplace.
In other words, in the span of barely a month, three different major platforms have all announced the rollout of a “Model Marketplace” where advisors can use “robo” trading and rebalancing automation tools to implement third-party-managed models, without the need to fully delegate to a TAMP. Because, instead of using the TAMP, the advisor can simply use the robo software to implement directly all of the models and trade signals from the investment manager themselves, using the advisor’s existing investment platform!
Delegation Vs Automation And The Unbundling Of The Traditional TAMP
As noted earlier, a TAMP ultimately bundles together two core functions: providing a third-party investment management strategy (i.e., portfolio models), and implementing it (the back-office trading and other tasks to support the investment implementation process). From this perspective, the emergence of Model Marketplaces effectively represents the unbundling of the traditional TAMP.
In essence, the opportunity of a Model Marketplace is to distribute third-party investment management strategies (via their model portfolios) to financial advisors, for the advisors to implement themselves. Thus, the advisor can get access to outside “managers”, and their models, without fully delegating the portfolio management role and the associated discretion; instead, the manager sends the model (and its trade updates) to the marketplace, and the advisor implement it themselves. Except, with modern trading and rebalancing software, the implementation itself becomes largely automated anyway!
Of course, that still requires the financial advisor to retain responsibility for configuring and implementing the trading and rebalancing software itself. Client accounts still have to be onboarded by the advisor, loaded into the rebalancing software, and assigned to the model. And the advisor still must (or at least, should want to) review the suggested model trades (when the model changes) and “hit the button” to authorize the model trades in client accounts that the software queues up.
Nonetheless, Model Marketplaces fundamentally change the decision-making process about using a TAMP in the first place. Now, it’s no longer a question of “create and manage your own investment process and implement it, or delegate it all to a TAMP”. Instead, for those who want access to outside managers, now it’s simply a question of “do you want to retain control to implement the third-party investment models yourself (the so-called “Rep as Portfolio Manager” [Rep-As-PM] approach), or delegate to someone else to handle the trades and other back-office work of those third-party models too (with a full-TAMP solution)?”
In other words, it’s no longer a decision of “fully retain control” or “fully delegate” the process of investment model building and implementation. The Model Marketplace introduces a hybrid option – to select from third-party investment models, but retain control about whether/how to implement them, while using technology to ensure that implementation isn’t onerous.