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Here’s my call for 2018: Most roboadvisors are going to fail. Read on to see why I don’t drink the RoboKool-Aid that the financial industry and media are serving up.
A little revenue problem?
There is so no such thing as a little revenue problem. If you have a problem with revenue, that’s a big problem.
All the time.
This applies to anyone in any business working in any part of the operation.
Here’s a little secret. Very few roboadvisors have sustainable business models. The industry doesn’t know this yet, because most of these businesses are in their nascent stages. Their owners are still trying to “wait and see.” But in a few years, when the net present value of their projects are still less than zero, they’ll have to send them to the product junkyard.
Here’s the intrinsic problem that very few roboadvisors, only the ones who have billions and billions, are going to be able to solve.
Roboadvisors were invented so that advisors could reach mass-affluent people. I’m really not sure these people are done a favor by roboadvisors.
The average person who uses a roboadvisor doesn’t have enough assets to qualify for a human advisor. Most of these people will do it themselves. There have been easy-access, low-cost products available to them before. Why not just invest in a Vanguard asset-allocation fund? The masses are not going to throw their money into the robo-pit when they already have solutions that offer the same benefits.
The venture capital industry thinks that people with millions and billions are going to invest in roboadvisors. I don’t see that happening. The firms expecting to see big portfolios on these platforms are very naïve.
What this means for the revenue stream is that the margins on these accounts aren’t high enough. You couldn’t scale the business if you wanted to. And that’s okay, because most roboadvisor platforms will never get anywhere. You see that even the big platforms like Betterment don’t have a sizeable portion of the total assets under management globally.
The big firms like Schwab are offering these platforms to their existing clients. What a bad idea. All that does is rob Peter to feed Paul. You’re essentially transferring assets into a lower fee product.
No way to differentiate
As I’ve said before in a bunch of articles I’ve written, the financial advisor space suffers from a deplorable lack of branding. Robos are just another symptom of this illness.
The definition of a roboadvisor is an automated system offered online that provides investors with investment advice with a minimal degree of human intervention. Where’s the branding opportunity? What can you possibly do to set yourself apart? Not much.
Maybe you can do something cute where you say you’re the roboadvisor for gluten-free investors. You only invest in companies who support the gluten-free trend or something like that. Then you have to spend a lot of money marketing to find people in that niche. It’s not exactly playing to the masses.
But at the end of the day, the product has to be the same as the next one. How different can one algorithm be from another?
Some roboadvisors say they are different because there is a human behind the model. Some say they offer great customer service support. Well, following that logic, is that really a roboadvisor?
The more you have to pay a human being a salary, the higher the overhead. How far can you scale this product before your margins break down? You can’t.
There’s only room for one, or maybe two, true roboadvisors in this space.
Nobody likes losing money
I’ve seen stoic, grown men cry over their portfolios. Obviously it’s not a pleasant human experience to go through when the market crashes and your hard earned money goes down the drain.
Most of these platforms were created after the great financial crisis because the Millennials shun Wall Street and anything that resembles it. But the Occupy Movement won’t have much to say when these rebellious platforms display numbers like -40% in the unrealized gain/loss tab.
When you have a live financial advisor, there’s a throat to choke. There’s damage control. When the market starts to crash, most of the time the advisor can give you enough of a warning so you can get out. And there’s all sorts of economic intelligence that human advisors offer to ease the pain and give people some clarity about what to expect.
Roboadvisors are products for a bull market, not a bear market. In a bear market, the advisor is the first line of defense. Being in a bad market without one is an experience that most people won’t enjoy. That day will inevitably come and it won’t be pretty for the industry. I was at Lehman in 2008. I saw the panic selling that happened.
Wait until the next big recession. You’ll see them all come crashing down.
Sara’s summary
Roboadvisors were invented so that advisors could use the internet to reach investors. I like the idea, but this is the wrong way to go about it.
To get more clients using the internet forget about the mass affluent. Target the bigger portfolios, not the smaller ones. There are enough underserved multi-millionaires who would more naturally align with the offering you currently have in place.
If you want to know how to do this then send me a message on APViewpoint or email me.
Sara Grillo, CFA, is a top financial writer with a focus on marketing and branding for investment management, financial planning, and RIA firms. Prior to launching her own firm, she was a financial advisor and worked at Lehman Brothers. Sara graduated from Harvard with a degree in English literature and has an MBA from NYU Stern in Quantitative Finance.
Read more articles by Sara Grillo
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
