The Baltimore-based fund giant's robo is plain vanilla when viewed in a vacuum but disruptive in the flush target date fund market

March 24, 2017 — 8:39 PM UTC by Brooke Southall

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Brooke's Note: In national defense, both kinds of missile technology have a place. In the case of ICBMs, you set them on their course and hope for the best -- or the worst. But cruise missiles and drones can be fired, steered and even halted after launch. The smarter technology makes them much more versatile and much more conducive to strategic use. Target date funds are the intercontinental ballistic missiles of investing: effective in their simplicity, limited by their ability to shift course on the fly. So here comes T. Rowe with a robo-advisor exclusively for retirement funds. As a robo-advisor, it doesn't seem to break much new ground. But as a de facto next-generation target date fund in the hands of a company that grows by tens of billions in these kinds of automated investing assets annually, this move starts to look interesting indeed. It's a robo that almost goes out of its way to avoid millennials or to suggest that fees are a central part of a value proposition. It's more of a self-disruption -- but without having to disrupt itself on price. Among the drone of robo news, this one stands out.

Set it and forget it. But now you can change course if your target moves while the arrow is in flight.

T. Rowe Price Group Inc. is launching a free, but not, robo-advisor that could surpass rivals based on the firm's mind-boggling success in target date funds.

The patriarchal mutual fund company that manages $810 billion out of Baltimore is setting its sights on accruing tens of billions in rollover dollars virtually exclusively from digitally averse Gen-Xers and baby boomers. 

At a glance, the firm's launch of ActivePlus Portfolios has a flat look. Most robos choose from a universe of dirt-cheap index funds. This automaton -- which relies on the asset allocation decisions of humans -- is limited to investing in mutual funds cooked up in the T. Rowe kitchen. The firm's robo-portfolios are built from eight to 13 funds, including funds otherwise closed to the public for new assets. 

Faith in boomer digital prowess

It's also pricey -- typical robos charge all-in fees of less than 50 basis points; T. Rowe projects this one to cost investors between 61 and 82 basis points based on the fees charged in the underlying mutual funds. See: T. Rowe Price plucks an RIA 'pain' expert from Vanguard Group to rethink asset management delivery. The ActivePlus model also presumes that baby boomers and GenXers are willing to be digitally interactive with their assets -- a leap considering how popular target date funds are precisely because they remove that burden from investors.

But to focus only on the new robo's cost ignores T. Rowe's success in automated investing before robos were even a twinkle in their founders' eyes. The firm currently manages about $165 billion of target date funds and those funds command 60 to 80 basis points. See: Why I use target date funds for some 401(k) clients in my RIA but with exaggerated scrutiny and care.  

As much as 90% of all new 401(k) contributions by 2020 will flow to target date funds, Boston-based Cerulli Associates estimates. The total mutual fund asset in target date funds is approaching $900 billion, according to Morningstar, Inc.

Automation at that level of expense moves rapidly off the shelves at T. Rowe because of the firm's powerful market positioning in the 401(k) business.

"Frankly, it's been a huge success," says Ron Surz, principal of Target Date Solutions, which designs and manages target date funds from San Clemente, Calif. "They've enjoyed the benefits of being one of the country's largest recordkeepers."

For investors confused about the digital aspect of the robo, T. Rowe will offer human help via a 1-800 number.

Margin and market

Only giant recordkeepers Malvern, Pa.-based Vanguard Group and Boston-based Fidelity Investments command more market share in this target date category -- and neither commands the same fee premium for their services. T. Rowe entered the target date business in 2002. See: After 'a lot of flak' Fidelity Investments does a study and pledges to change how it manages its $170 billion of target date funds.  

After surveying the outsourced robo software field, T. Rowe decided to bring the engineering effort for its robo in-house. It's been in the internal pilot phase since autumn and launched two weeks ago. The new T. Rowe robo is expected to largely mimic target date funds as a landing place for the rollover assets of baby boomers who are too busy to manage retirement funds but who don't necessarily want to hire a financial advisor. The robo will not be available to financial advisors. See: Schwab employee 401(k) lawsuit taunts Chuck by using Vanguard as Exhibit A.

"They cost [the investor] about the same as target date funds," says Tom Kazmierczak, head of individual investors products and services for T. Rowe Price. "But circumstances may change and with [ActivePlus], you can update."

He adds that the new robo piggybacks the findings of the internal research team at T. Rowe, whose sole purpose is to determine asset allocation for target date fund investors.

ActivePlus Portfolios is currently only available for individual retirement accounts with a minimum of $50,000. Investors receive a model portfolio recommendation after answering a short questionnaire to assess risk tolerance, time horizon and investment goals.

Adjustable TDFs

Target date funds have enjoyed stunning success due to their set-and-forget simplicity -- financial management built in for an agreed-upon period of time. But their potential failing is that the investor's targets may shift over time and target date funds have no override mechanism. Maybe a spouse dies or a ne'er do well kid decides to go to college after all. See: Why I use target date funds for some 401(k) clients in my RIA but with exaggerated scrutiny and care.

T. Rowe's robo will allow an investor to adjust on the fly to alter risk appetites as well as long- and short-term goals. Another difference: T. Rowe's target date funds tend to allocate to equities far more aggressively than the competition -- with the glide path grooved sharply in equities --  55%, even at the target date. 

The new robo will also be aggressive on behalf of young people -- with 100% of assets in equity funds. And, for the most conservative investors, the robo allows for portfolios with as little as 10% equities and the remainder in fixed income. See: Why target date funds fail in the one area they're supposed to succeed -- downside protection.

What works so well in theory may also work in the marketplace.

"Marketing is everything so I think they'll do just fine," Surz says.


Mentioned in this article:

Cerulli Associates
Consulting Firm
Top Executive: Kurt Cerulli



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