Are robo-advisors short-circuiting?
In May, Investec, an asset management group listed in London and Johannesburg, closed its Click & Invest robo-advice business, revealing that in two years the service had cost it $40 million (£32 million).
“The reality has been that the appetite for investment services such as ours remains low and the market itself is growing at a much slower rate than expected,” Investec said.
Click & Invest lost $16.2 million (£12.8 million) in the financial year ending March 2019, following losses of $17.7 million (£13.5 million) a year earlier, plus software costs of $7.6 million (£6 million).
Investec’s news, plus the decision by UBS in August to close its online investment service, SmartWealth, won’t send advisors reaching for their hankies. But as the market for robo-advice continues to grow, with global revenues expected to hit $73.7 billion by 2023, how worried should advisors be about a potential robo-apocalypse?
“We are slightly early in terms of getting robo-advisors to go from the tail to the mass market,” says Devie Mohan, founder of Burnmark, a fintech research company.
Robo-advisors, which allocate investments based on how a user answers questions on their attitude to risk, have grown fastest in the U.S., which has more than 200 firms, according to Burnmark. But many providers have struggled to make their services profitable, especially those that deal directly with customers.
Mohan points to two key reasons why many robo-advisors are struggling. It costs a robo-advisor $389 on average to acquire a customer, according to 2018 research from Burnmark, while the average account size of $27,000 only produces revenue of $90. Let that sink in.
Providers have experimented with different ways to reduce this cost, some by using AI to provide advisory and marketing services. But this might work best for new retail customers, who need education around wealth management. And even they might be turned off if the AI guidance is not tailored to their needs.
On the other side, experienced investors want to be able to make decisions themselves or with a wealth advisor and may not appreciate the interference of an algorithm.
“UBS was the latter category, most of the clients they offered the product to were high-net-worth individuals and familiar with the personal service,” Mohan says. “It’s difficult to change that – it’s a case of habit.”
Also, team changes and bureaucracy within big companies have resulted in a natural two-year lifetime for many fintech products. In June, JPMorgan’s closed its digital bank Finn, two years after a pilot program in St Louis. “It’s a trend: two years ago, they all started up, and now they wound down,” Mohan says.
Also, partnerships between smaller fintechs and larger incumbents through investment or a majority stake have often backfired.
Simon Bussy, director of wealth at Altus Consulting, says these relationships often start well but turn sour after the honeymoon period when the two parties get frustrated with one another: “Typically [this happens] when the big brand imposes its iron-fist risk and compliance approach and dominates the board, forgetting the reasons that attracted them to the nimble fintech in the first place.”
A hybrid model may be the most sensible approach. Blackrock and Schwab both have advisory services that allow clients to get in touch with a personal advisor when needed. “These are successful models because there is subtle education that happens to convert manual advice into robo-advice, but there is always the option to have personal advice,” Mohan says. “That gradual shift is what’s going to help grow robo-advice.”
How long, then, before the robots take the reins? Mohan believes the future of the market is with today’s digital natives. “I think it will happen,” she says. “People aged 15 to 25 now will start investing in the next five to 10 years.”