Competitive Analysis – Digital

Matthew DreilingIntern

June, 30, 2016

Digital Target Market

2

Company Target Market

Vanguard Passive fund investors looking for an established company

Betterment Millennials, entry level investors

Wealthfront Tech savvy people (Silicon valley based), minimal tax service seeking people

Personal Capital People looking for more human interaction

Alpha Architect Robo investors of active only funds

• Generally, Robo advisors are fit for younger or beginner investors with low net worth and uncomplicated financial situations. They tend to market to those who don’t want to have to get too involved with their investing. People who prioritize comprehensive digital features and functionality gravitate towards using these services.

Digital Market Share

3

Digital AUM

VanguardCharles SchwabBettermentWealthfrontPersonal CapitalFuture AdvisorAlpha Architect

Company AUM (Millions)

Vanguard 31,000

Charles Schwab 5,300

Betterment 3,300

Wealthfront 2,800

Personal Capital 1,800

Future Advisor 700

Alpha Architect 150

*A.T. Kearney predicts that Robo Advisory will manage $2 trillion by 2020.

• Low cost: Minimum account requirements continue to shrink to appeal to the masses, especially the millennial investor who has very little to invest. Expense fees are remarkably low due to minimal human intervention.

• Automated rebalancing: Portfolios are automatically rebalanced for clients goals. The automation means lower costs for consumers because humans don’t have to do it. They offer several easy to use interactive tools online based on client’s individual input data to suggest portfolio type.

• Tax loss harvesting: They emphasize computerized tax loss harvesting to maximize long term gains.

• Simple and easy to use: For people who don’t want to take the time to learn a lot about investing, they make it simple for a point and click consumer to start investing smartly and with low commitment. The apps and web tools give tech oriented investors an easy interface to use.

• Passive funds: They mainly use Index and ETF funds, on the logic that these yield lower fees, which lead to higher long term returns.

Digital Marketing

4

Focus Points

• Channels: Robo-advisors and some early-adopting traditional advisor firms are pursuing multiple strategies – such as marketing directly to retail clients and as a white labelled offering for financial advisors – to scale more rapidly and sustain profits.

• Educational promotion: Traditional marketing can attract clients to a robo-adviser website or app. Examples of promotional content include an educational e-book, white paper and video. "When a potential investor is coming across the firm for the first time, if they are providing any bit of information at the very early stage of interaction with them, then it opens the door to a conversation where both sides are benefiting from the very beginning.” - Jimmy Douglas, General Manager, Advisor Launchpad

• Email: Using email signatures is a way to market the robo offering. Redhawk Wealth Advisors has a link to the robo at the bottom of every email that its advisers send, which also allows executives to track which links generate the most leads.

Digital Marketing

5

Strategies

Source: Alessandra Malito, InvestmentNews

Robo Advisor2015 Betterment Charles

Schwab FutureAdvisor Hedgeable Personal Capital

Rebalance IRA SigFig TradeKing

Advisors Vanguard Wealthfront WiseBanyan

Fees 0.15% – 0.35%/yr None 0.50%/yr 0.75% –

0.30%/yr0.89% – 0.49%/yr

$250/setup, 0.50%/year

None first $10k, 0.25%/yr

for more

0.25% – 0.50% 0.30%/yr

None first $10k, 0.25%/yr

for moreNone

Minimum Deposit $0 $5K $10K $0 $25K $100K $2K $500 $50K $500 $10

Automatic Rebalancing Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Tax Loss Harvesting Yes $50K+ Yes Yes Yes   Yes     Yes Yes

Advice Automated Automated Automated Automated Human Assisted

Human Assisted

Human Assisted Automated Human

Assisted Automated Automated

Assets Under Management $4.0B $5.3B $695M $35M $2.4B $245M $94M $12M $31B $3.5B $49M

Mobile App Yes Yes Yes  Yes  Yes    Yes  

   Yes Yes

Retirement Planning Tools

Yes       Yes         Yes  

401(k) Guidance Yes   Yes   Yes            

IRA/Roth IRA Yes Yes Yes Yes Yes     Yes Yes Yes YesSEP IRA Yes     Yes       Yes Yes Yes YesTrusts Yes   Yes Yes Yes     Yes Yes Yes  529 Plan     Yes             Yes  

6

*More Information provided here

Digital Product Profile

Marketing/Product Profile

7

Vanguard: Overall a solid entry into the robo-advisor space. Though the service will exclude beginning investors because of the high minimum deposit. Other robo-advisors have cheaper annual fees.

Features:• Wide variety of account types • Covered by SIPC insurance • Services are self clearing • $50,000 minimum

Strengths:Personal Advice - Unlike some robo-advisors, you actually get a live person managing your account and in charge of your investments.Multiple Methods of Access - Access your account online and via a mobile device.Low Fees - At 0.30%, Vanguard's annual management fee is much lower than a traditional financial advisor.Access to Vanguard Funds - Vanguard offers some of the lowest expense funds in the mutual fund and ETF universe, and all Personal Advisor Services clients get access to the very low fee Admiral class mutual funds with no per-fund minimums.

Weaknesses:High Minimum Deposit - Beginning investors will have to look at other robo-advisors since the minimum is $50,000.Not The Cheapest Robo-Advisor - Firms like Betterment and Wealthfront are cheaper especially at higher deposit amounts.No Tax-Loss Harvesting - Unlike some of the other robo-advisors they lack this functionality. Though they do allocate most efficiently between taxable and tax-deferred accounts within the service.No In-person Meetings - You'll have to deal with your advisor by phone, Email or video chat since Vanguard doesn't have physical offices.

Marketing/Product Profile

8

Charles Schwab: Overall a decent service that deserves a looking into. They commit to a large allocation to cash and ETFs in order to make the service free.

Features:• Free• Individual portfolio recommendations • Customizable portfolios (choosing ETFs)• Large cash allocation (6-30%)

Strengths:No Fees - No direct fees to you outside of the annual fees for the ETFs within your portfolio. Though the large cash allocation and trade executions can add to the loss of possible long-term market gains.Tax-Loss Harvesting - With an account of $50,000 or greaterOption To Remove of Three ETFs - A unique feature in this space, you can remove up to three ETFs in the model portfolio they create for youAutomatic Rebalancing - The service will automatically rebalance your portfolio once it meets specific thresholdsMost ETFs are Charles Schwab - Most of the ETFs used are Charles Schwab and good if you like your investing all inclusive.

Weaknesses:Large Cash Allocation - Anywhere from 6% - 30% of your investments will be in cash earning zero interest. Over the long-term the cash drag can significantly reduce your returns and question the ulterior motives.Large Tilt to Small Cap Stocks - A larger percentage compared to the competition is allocated towards small-cap stocks.No Fractional Shares - The investments will round down to the nearest whole share when investing.

Marketing/Product Profile

9

Betterment: A good starting point for young investors. They make investing easy for beginners by focusing on simple asset allocation, goal setting features, and low-cost portfolio management. RetireGuide Calculator can help with retirement planning by including your existing investment accounts.

Features:• No initial deposit• Low fees (decreases as account minimum increases)• Customized portfolios based on risk profile and account type• Tax loss harvesting• Automatic portfolio rebalancing and deposits

Strengths:Simple Asset Allocation — Betterment teaches the ropes to investing and, more importantly, proper asset allocation. Low Management Fees — Their fees are low enough that if you have less than $10,000 to invest it won't eat away much of your investments.Perfect for Young Investors — Betterment makes investing accessible for young investors by automating the investing process. It leans heavily toward dollar-cost averaging, which is the perfect long-term investing solution for inexperienced or young investors.RetireGuide Calculator — An easy-to-use retirement planner tool, though not as comprehensive as Personal Capital's Retirement Planner

Weaknesses:Not the Best for Higher Net Worth Individuals — For the more advanced investor or higher net worth individual, Betterment might not be the perfect fit. If you can roll your own asset allocation and know investment theory, there's little need for using a service like Betterment.No Two-Factor Authentication — Currently Betterment does not support two-factor authentication security, which would make it more difficult for hackers to compromise your account.

Marketing/Product Profile

10

Wealthfront: An automated investing service with an emphasis on asset allocation with low fees. Wealthfront's service really shines with taxable accounts.

Features:• $500 initial deposit• First $15,000 managed for free• Customized portfolios based on risk profile and account type• Tax loss harvesting & Tax optimized direct indexing• Automatic portfolio rebalancing and deposits• Mobile app access and TurboTax integration• 529 college savings plan

Strengths:Tax-Loss Harvesting available for all accounts — Previously only taxable accounts over $100,000 had this option. Now every Wealthfront account qualifies.Direct Indexing — When investing over $100,000 it's a futher way to decrease taxes and fund expenses by avoiding ETF fees.529 Plan Option — This option makes their services somewhat unique in that most robo-advisors focus only on retirement planning.Free Portfolio Review — Look at accounts outside of Wealthfront to determine if you can lower your fees.

Weaknesses:No Fractional Shares — It's possible with your account to have cash sitting in your account not invested.

Marketing/Product Profile

11

Personal Capital: A free and easy-to-use service that syncs up all your financial accounts in one location. Personal Capital creates summaries of your spending, net worth, and most importantly your investment portfolio. The upsell is their paid financial advisory service.

Features:• Retirement planner & budgeting tools• 401(k) fee analyzer• Investment checkups & asset allocation targeting• Upcoming bill reports & investing email notifications• Website, Mobile, and Apple Watch App

Strengths:Holistic View of Your Personal Finances — Encompasses all of your finances in one easy-to-use service. You have access to all your finances in one location. Investment Checkup — It's a decent starting point and should be adequate for most individuals.Apple iPhone, iPad, Apple Watch and Android support — The app features are similar to the desktop edition and can be used on the go.Great Reporting — Similar to Morningstar's X-ray tool, Personal Capital offers a great way to drill down into asset allocation and performance.Easy To Use — Account setup is brain-dead simple. Their user interface navigation and reporting is well laid out.

Weaknesses:Asset Allocation Is Not Customizable — Personal Capital has predetermined asset allocation models. Budgeting Tool Needs Improvement — You can monitor cash flow and spending. Budgeting within Mint is easier to use. The spending feature within Personal Capital is available only on the mobile app and not within the website.Cannot Reconcile — You cannot reconcile your monthly bank statements to ensure all transactions are accounted for. Though since the transactions are coming from your bank directly they should be in sync.

Marketing/Product Profile

12

FutureAdvisor: Use FutureAdvisor to monitor your retirement portfolio, see if you're on track, help make changes and even manage other personal goals like college savings. Most of these features are free or low cost.

Features:• Free retirement planning• Free college savings planning and 529 management• Investment management (0.50% annual cost)• Advisor comparison• Investing library with educational content

Strengths:Free Advice - You can try out the service at no cost.Link Up Brokerage Account - FutureAdvisor can automatically perform the trades to get your account into their recommend allocation. More Flexibility - Unlike Betterment or Wealthfront in which you must transfer assets to their firms. FutureAdvisor gives recommendations based upon your existing portfolio.Easy-to-Use Interface - Better user interface when compared to Wealthfront, but not as good as Betterment'sTax Loss Harvesting - Decrease your taxes by taking investment losses and pair up with your gains. Retirement accounts don't have to be concerned about this issue.

Weaknesses:Slightly Higher Fees Than Competition - When compared to the other robo-advisors FutureAdvisor is slightly on the expensive side.Limited Asset Allocation - Asset allocation isn't as flexible when compared to Betterment's service.Not for Overall Financial Planning - Unlike Mint.com or Personal Capital, FutureAdvisor can not be used for daily finance and budgeting.

Marketing/Product Profile

13

ETRADE: ETRADE’s new Adaptive Portfolio accounts for market trends and risk tolerance to routinely adjust itself, putting less stress on the client. It’s late entry to the robo market requires it to differentiate itself from the others, and it does this by offering hybrid portfolios made up of ETFs and active funds.

Features:• $10,000 minimum deposit, 0.30% net fee on AUM• Hybrid ETF and active fund portfolios• Cash bonus for starting new accounts

Strengths:Hybrid Portfolio - ETRADE is one of the only robo advisors to offer any form of active and passive funds in their asset allocation, which could appeal to those who look for a mix of both. This is the default starting option and people can switch to an all ETF fund if they so desire.Cash bonus Incentive - They take it one step further and actually pay you to start an account. +$100 if less than $25k starting balance, +$1500 if greater than $500k starting balance.Automated Experience - The SVP of digital channels Kunal Vaed says the idea is for the client to enjoy their investment experience with a minimum level of anxiety.

Weaknesses:Active vs Passive - The majority of active funds have been shown to underperform their passive counterparts over time, but some clients still prefer their portfolio be managed by a professional rather than an algorithm. A study by ETRADE shows that 50% of investors prefer a mix of both, whereas 27% said they want sole human management despite the higher costs, and just 23% want sole algorithm management with automatic rebalancing at a low cost.

Only 19% of consumers are familiar with the concept of robo advisors.*

Familiarity and comfort levels decrease with age. Only 2% of Baby Boomers were familiar with robo-advisors and only 1% currently uses them. The numbers change to 13% and 7% respectively with Generation X and 20% and 11% respectively with Generation Y.

This shows an adoption rate of about 50%. Around half of the people familiar with robo advisors decide to use them.

$30 trillion will be transferred over the next 30 years from baby boomers to their millennial children. That will leave trillions in investable assets over the years.

Industry Statistics

14

*Scott R. Kallenbach, Research Director, Strategic Research, LIMRA

American Century – Digital Options

15

Partner - Partnering with an existing robo-advisor can enable traditional firms to react quickly and typically has lower costs and limited organizational changes. It can also deliver complementary and promptly-realized advantages through process automation, cost reduction and the attraction of new customers. By partnering, traditional advisors tend to avoid many of the costs and risks inherent in implementing a customer solution into legacy systems. However, partnering can also come with potential risks, including impeded flexibility, a symbiotic reliance, and conflicting future objectives. Example: Betterment announced a partnership with the Institutional Wealth Services division of a large, Boston-based asset management firm. Independent Registered Investment Advisors (RIAs) will have access to Betterment’s online tools to help their clients set financial goals and establish ETF-based portfolios.

Develop - Another way traditional advisors can effectively respond to the robo-advisor opportunity is by developing an in-house platform for both existing clients and new investors. This enables advisors to promote it as a low-cost alternative to traditional advisory services and provides the flexibility to offer varying functionality to help attract new investors. However, firms should consider how these business-to-consumer capabilities inter-play with the broader organization and the potential risks of channel cannibalization. Example: Vanguard officially rolled out their hybrid robo-advisor service in May, with an asset requirement of $50,000. The hybrid service combines computerized asset allocation and rebalancing with access to human advisors over the phone and via videoconferencing. Their Personal Advisor Services, which charges 0.30% of assets a year, had attracted more than $7 billion in new advisory assets as of March 31. That’s on top of nearly $10 billion that Vanguard moved from its older financial planning service, which required $500,000 in assets and cost 0.70% a year.

Acquire - When acquiring a robo-advisor, firms should identify a target firm based on a growing customer base, opportunities for further growth, technology capabilities and the potential “fit” within their organization. While this could be an accelerated route-to-market for traditional investors, acquisition has its risks. How the firm is able to effectively integrate the acquired platform within its existing infrastructure will be key. Example: None at this time. The market is generally well-positioned for consolidation and a recent proxy example is the acquisition of financial planning firm, LearnVest, by Northwestern Mutual. Acquisition could be a fast channel to some markets for firms lagging behind, and will likely see increased focus as the market further matures

Source: Deloitte. "Robo-Advisors: Capitalizing on a growing opportunity"

American Century – Looking Forward

16

• It Can Wait - Our average client is over 50 and our funds are entirely actively managed. These are two good reasons among many that robo-advice may not be as necessary for us in the immediate future.

• Growing Opportunity - However, as our client base evolves and wealth is created by and transferred down to younger generations, A form of robo advisory will likely be seen as the norm in most of our industry. Vanguard, Fidelity, BlackRock, and Charles Schwab have already adopted or are currently forming their own services. The real advantage that this platform has is that it caters to entry level investors who might not know or care a lot about investing at the time, but still want to grow their money without having to hire a professional financial advisor.

• Economic Climate – One thing that prevalent robo advisors don’t have included in them is actively managed funds, which tend to outdo passive funds in certain areas. The rise of popularity in ETF based robo advisors have seen glory recently because of the 7 year expansion our economy has experienced. In a prolonged contraction, we could see a dip in popularity of this type of platform, since they ride the market fluctuations so closely. This could be a good opportunity for entry by marketing a safer choice. Active funds also have more potential in emerging markets, so that could be another one of our main differentiators and selling points. The exception to this trend is ETRADE, who just launched a hybrid active-passive portfolio. Cheaper ETFs make up only 20-50% of the portfolio and customers who choose this strategy end up paying fund expense ratios of 0.20-0.45% a year, compared to just 0.03% in some ETFs. A study they conducted shows that 50% of investors actually prefer a mix of both.

American Century – Looking Forward

17

• Mobile Packaging – The widespread influence of advancing technology shows a demand for mobility and simplification. Since our client base is so vast it would be wise to eventually adopt a mobile platform and commoditized package for people to view and invest. They need a place they can go to simply do what they need to get done quickly, in and out. A mobile app or platform that’s very simplified and guided as far as making it easy for clients to interact with us is necessary. Ideally the platform would have just the basic options: Account, Funds, Advice Tools, etc. More extensive options (deposits, redemptions, getting started) can be made available by a link to our website or a call to the contact center. Complete reliance on mobility is not going to overtake traditional services, but to ignore it would be to ignore a notably growing demand for consumers. Example: Vanguard has an all encompassing app platform where investors can view their account, transaction options, portfolio makeup, funds, and market news. Fidelity is more information specific, like streaming market news and viewing portfolio details.