I have long been a paid-up member of the disruptors brigade, arguing technology will make us all happier, wealthier individuals – along the way upending whole business sectors.
Given this enthusiasm for all things disruptive, a penchant for robo-advice was inevitable – largely because I have long seen it as an extension of the DIY-investor revolution. But even this believer has harboured severe doubts about the business model of the (once) fast growing sector. I have been to more seminars with robo-advice evangelists than hot dinners – and every time I have left wondering: “where is the money coming from to find all these new customers?”
At this point, my natural cussed-contrarian instincts crash into the technobabble and I am left wondering whether all those breathless predictions of exponential growth will survive an encounter with the hard facts.
It is not hard to find an endless series of consultants' reports predicting massive growth. There is A.T. Kearney, for instance, forecasting assets under management by robo-advisers might increase 68 per cent annually to about $2.2trn in five years.
New players struggling
So how do we reconcile this enthusiasm with the hard facts? At this point it is worth introducing the excellent Michael Kitces, who runs a website in the US that has reported extensively on the US frontline of the robo-revolution. Like me, he is a believer in disruption and the need to use technology. It is just that he has also looked at the hard facts – and come away worried.
His bottom line is the robo-advice revolution, led by start-ups, is stalling in the US and most of the new technology players are unlikely to survive in their current shape for more than a few years.
The cause of their apparent imminent demise: origination. Or, as Kitces puts it: “an inability to scale their marketing to sustain growth rates in the face of increasing competition and challenging client acquisition costs, coupled with a similar inability to grow their average account sizes”.
Some of the stats on the new robo-platforms, such as Betterment, Personal Capital and Wealthfront, are startling.
Crucially, average investment sizes remain small. Kitces reports an average account size of $20,000, which, in turn, produces revenue of just $50 per year at a 0.25 per cent fee schedule. He adds: “Even if robo-advisers are managing to achieve a 98 per cent monthly retention rate and facing just 2 per cent monthly churn, their annual retention rate will be barely 80 per cent, which equates to projected lifetime client revenue of just $250 cumulatively”.
'Pivoting' business models
But I would argue robo-critics are missing the point. Of course origination problems – customer acquisition – will hole the upstarts below the water line. One (Betterment, with deep pockets) may survive in each market but the real change is happening at the big firms, where brand name and customer trust has been built, expensively, over many decades.
Some of the upstarts might even survive by 'pivoting' their business model into new, but related, areas such as alternative investments, self-indexing, or helping DIY investors to improve their skills and loans – in effect becoming online full financial advisers.
I would also observe that techno-evangelists need to stop focusing on the millennials as a growth market as they are too skint to make much difference.
Where robo-advice will make a huge impact is as an online competitor to the wealth space.
Holly Mackay, founder of The Platforum and Boring Money blog, says robo-advice is “more likely to displace the red braces wealth management brigade and find its way into affluent, older households”.
Her most recent report found that 40 per cent of Britain's ”wealthiest households like the idea of robo-advice, compared to a national average of just 18 per cent”. Robo-advice is just an extension of DIY-investing for adults.
Finally, robo-advice is about diffusing technological change down the food chain – into advisers' hands. As one US-based adviser guru Tony Vidler put it, robo-advice is being used to augment financial advisers – turning it into a B2B product.
This article first appeared on Investment Week.
