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.
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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-advisers
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.
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By GlobalDataOur 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.
Robo-advisers
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.
