While robo-advisers bring real value and utility, there is mounting evidence that robo-advice alone will not attract affluent investors, according to GlobalData Financial Services.
There has been an explosion of robo-advisers in recent years. However, the sector has also saw an impressive list of failures, with another, Hedgeable, closing in July.
With Hedgeable closing in July, preceded by the closures of WorthFM, SheCapital, and Owners Advisory, the marketplace is now littered with the corpses of fallen robo-advisers. Each failed in its own way, but there are some important lessons that can be learned.
First, when a key selling point of the service is its low costs, you have to have a mass market strategy. In other words, in order for any robo-adviser to be successful, it must be attracting AUM in the billions of dollars.
Robo-advice is a volume play, not a margin play, so the boutique specialist angle is not practical. Wealthfront, Betterment, and a few other major brands such as Acorns are strong enough and broad enough to attract enough clients. Start-ups with little brand awareness and very targeted addressable markets are not.
Second, robo-advisers by themselves do not bring in the AUM. HNW investors are not flocking to transfer their assets to standalone challenger platforms.
Our 2018 survey of wealth managers found that just 10% of private wealth managers feared they would lose market share to robo-advisors over the next 12 months.
Indeed, as can be seen from the reports of many robo-advisors, their clients are entrusting only small portfolios to the digital-only platforms.
ElleVest’s investors are giving it just $7,400 on average. Hedgeable ended with $47,000 per account on average, despite marketing its offering as HNW-ready.
Either platforms’ users are not HNW individuals, or they are not comfortable handing over the bulk of their assets to be managed by algorithm.
Third, despite these drawbacks robo-advice is a competitive advantage that all traditional wealth managers must acquire.
There is an enduring and growing demand for robo-advice, with 40% of private wealth managers noting strong demand for the technology from their clients, more in the fast-growing Asia Pacific region.
Investors are increasingly aware of some of the technology and will increasingly see it as a tool that every wealth manager should be deploying on their behalf.
Traditional wealth managers are not about to lose their best HNW clients to a start-up robo-adviser, no matter how slick the digital interface. But they might just lose out to a competitor that has adopted the technology and integrated it into its overall private wealth management proposition.