How E*Trade’s Robo-Advisory Service Will Power Growth In The Future

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ETFC: E*TRADE Financial logo
ETFC
E*TRADE Financial

E*Trade Financial (NASDAQ:ETFC) ventured into the domain of robo-advisory with the launch of its Adaptive Portfolio tool this week. [1] This move follows the release of research conducted by E*Trade back in February discussing investor awareness of robo-advisory and revealing interest in availing these services in the long run. Competing brokerage firm Charles Schwab (NYSE:SCHW) introduced its automated online investment advisory service Schwab Intelligent Portfolio in the March quarter of last year, which has grown massively over the last few quarters.

E*Trade generated $210 million from fees and service charges, which includes fees earned on customer assets. The total customer assets with E*Trade at the end of 2015 stood at $45.5 billion. We currently forecast the total client assets to grow at a CAGR of 2% through the end of the decade to just over $51 billion, and resulting fee and services revenue to increase to about $290 million.

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However, the addition of Adaptive Portfolio to its services could help E*Trade accumulate a greater share of client assets. Robo-advisory has some advantages over more traditional services, including minimal human intervention, minimal time constraints and low minimums of investable assets for eligibility to advisory services. It has several advantages for the companies offering automated advisory, which include negligible employee costs, low administrative and capital expenditures, and a potential faster rate of new customer acquisitions – often first-time investors. According to a report by A. T. Kearney, the adoption rate of robo-advisory could go up to 6% of total invested assets in the U.S. by 2020. [2] Moreover, the total assets under management by robo-advisors in the U.S. is forecast to grow at a CAGR of 68% through 2020 to reach $2 trillion worth of invested assets managed industry-wide.

robo6According to E*Trade’s management, the company will charge around 0.30% of fund value for robo-advisory services, which can go up to around 0.55% for ETF-only funds and 0.80% for hybrid funds. If the growth rate of total client assets at E*Trade is 3% through the end of the decade, with the implied asset management fee increasing by 20 basis points in the same duration, the revenue generated by fees and service charge could grow at a CAGR of 11%. Comparatively, if the asset management fees increases to 0.76% by 2020 with the total client assets growing by 4% through the end of the decade, E*Trade’s fees and service charge revenues could double to $420 million in the same period. In addition to revenue growth, the increasing mix of robo-advisors could impact the operating margins of brokerage firms.

You can modify the interactive charts below to gauge the effect a change in E*Trade’s EBITDA margin and segment revenue for fees and service charge will have on our price estimate for the company.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for E-Trade.

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Notes:
  1. E*Trade Enters the Robo-Advisor Wars, Fortune, June 2016 []
  2. Hype vs. Reality: The Coming Waves of “Robo” Adoption, A. T. Kearney, June 2015 []