Niche stand-alone robo-advice services will likely end up in the digital dump, a recent survey of wealth managers has found.
The report by UK-headquartered research firm, GlobalData, says high net worth investors in particular were unlikely to decamp en masse from traditional wealth management firms to an automated advice provider. Just 10 per cent of wealth management firms expected to lose business to robo-advisers over the next 12 months, the survey found.
In a statement, Andrew Haslip, GlobalData financial services analyst, said: “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-advisor 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 targeted addressable markets are not.”
The GlobalData survey coincided as New York-based boutique investment firm, Hedgeable, amputated its robo-advice arm early in August. Hedgeable’s robo-advice service, which offered actively managed strategies across exotic asset classes, closed just shy of its 10th anniversary after gathering about US$80 million and 1,700 clients.
The exit of Hedgeable follows the failure of a couple of digital-only, female-focused US advice businesses – SheCapital and WorthFM. SheCapital lasted barely a year before folding in July 2016 while WorthFM threw in the towel this July after less than two years in business.
“We set out to build a platform designed to make investing clear, transparent and educational,” WorthFM told clients. “Due to many factors including industry shifts and our own business, we are no longer be able to serve as your investment advisor.”
Closer to home, the Australian Macquarie Bank-backed Owners Advisory shut down last July following the death of its founder, John O’Connell. Macquarie discontinued the Owners Advisory direct client business but shifted the technology over to its wrap service, which is used by financial advisers.
In 2016 Deloitte estimated there were over 100 robo-advisers already in operation at the time. Just one personal robo-advice system – offered by Kiwi Wealth – is currently available in NZ under an interim regulatory exemption. Nikko Asset Management NZ is also due to launch an exempt robo-adviser soon before a law change formally legalises personalised digital advice in the next few months.
Regardless of the failure of several niche providers, the GlobalData report says the robo-advice market is still set to grow – albeit ensconced in existing wealth management firms rather than distributed among fintech start-ups.
About 40 per cent of wealth managers in the GlobalDate survey noted growing demand for technology-based advice solutions – especially from clients in the Asia-Pacific.
“Despite some drawbacks robo-advice is a competitive advantage that all traditional wealth managers must acquire. They are not about to lose their best HNW clients to a start-up robo-advisor, no matter how slick the digital interface,” Haslip said in the release. “But they might just lose out to a competitor that has adopted the technology and integrated it into its overall private wealth management proposition. Although ultimately the human element will remain prominent in the world of financial advice, the industry will continue its technological advancement.”
A white paper published by Auckland-based consulting, Mosaic Financial Services Infrastructure, concludes a ‘hybrid’ robo-advisory model – that combines digital advice with the option to seek human guidance – would likely emerge as the most popular approach.
