A. The robo-advisory is still far from mainstream
In 2016, robo-advisor assets under management was forecasted to reach $2.2 trillion worldwide by 2020 and $4.1 trillion by 2022. But currently, as of 2020, AUM for robo-advisory is around $1.4 trillion with only a select few standalone robo-advisors like Betterment and Wealthfront gaining scale. Unlike Uber in personal transportation and Robinhood, closer home in online brokerage, robo-advice has not lived up to the visionary outlook to make advice accessible to all and revolutionize personal investing.
Even as passive investing is becoming popular (there is over $6.3 trillion invested in global ETF/ETPs at the end of December 31, 2019 up from around $3.0 trillion at the end of 2015), AUM for robo-advisors has not followed the same growth pattern, though most robo-generated portfolios leverage ETFs.
Robo-advisors will need advanced technologies to improve their algorithms, drive more personalization in their offerings for millennials/ Gen Z investors. They need to involve human advisory at higher portfolio thresholds and expand distribution through Robo-for-advisor solutions. In addition, Robo-advisors can cross-sell and upsell other products like retirement and CDs, and differentiate based on the customer’s risk appetite and investment preferences.
B. Standalone Robo-Advisors Are Struggling To Break Even
Per experts, robo-advisors should manage between $11.3 billion and $21.5 billion to break even. In Europe, the breakeven AUM falls to $3.5 billion to $5.3 billion, based on a higher fee level of 0.45%. The main reasons robo-advisors struggle to break even are the low service fees, low average portfolio size, and high marketing costs required to acquire customers. For some customers, the revenue can be as low as $100 per year, whereas customer acquisition costs (CAC) for most robo-advisors are from $300 to $1,000 per client.
As income and responsibilities increase, ﬁnancial planning gets complex and requires constant intervention that can be provided by a human ﬁnancial advisor only. The early adopters of robo-advisors tend to move to traditional advisory with an increase in their wealth. There is a need for standalone robo-advisors to tie up with incumbents and specialized ﬁntechs to fulﬁll the needs of this migratory segment as they move to the higher end of the mass afﬂuent or enter the afﬂuent segment.
C. Getting tested during uncertain and highly volatile bearish market (e.g. COVID-19)
COVID-19 has wreaked havoc on investor portfolios. Robo-portfolios are no exception, given their dependence on ETFs, which have seen a sharp price correction. Ensuing market conditions will test investment and business models of robo-advisors as this segment will be facing its ﬁrst economic downturn.
The market reaction is different for different ﬁrms. For Wealthfront, new investment account signups were “through the roof ” during the market volatility while Betterment saw more “dip buying”, but overall, Betterment saw more inﬂows than outﬂows, and most inbound calls were about tax-loss harvesting and how to do more of it. Charles Schwab’s Intelligent Portfolios captured more of the market’s year-to-date downside than upside, mainly attributed to Schwab’s higher-than-average exposure to international equities, small exposure to high-yield and international ﬁxed income, and high cash allocation.
Robo-advisory ﬁrms, by design, have advantages in the crisis due to a focus on goal-based investing, which helps align the investment risk reward based on the risk appetite and time horizon of the investors. However, there are several aspects where robo-advice can improve in being responsive during such large market disruptions.
- Leading robo-advisory platforms need to show that their solutions can reliably manage downside risk and adjust investment llocationsaccordingly, per the investor’s goals and objectives, while taking into consideration long-term investing & short-term economic reactions.
- Integrated tools for chat functionality or video conference to connect with a team of human advisors for clariﬁcations on robo-advised portfolios and market-related adjustments needed
- Monetize technology platforms to drive higher revenues through licensing and white-label services and life-planning functionalities to prepare investors for adverse market scenarios. For example, investors can take advantage of scenario planning tools that model impact to investment goals and provide a view on ﬁnancial measures to help survive a job loss/ income contraction during the crisis.
Perspective: Future Scope of Robo-Advisory
2.1 Hybrid Robo-Advisors
Hybrid models combining the best of both worlds (digital and traditional) are seen as the future of investing with digital solutions for investment experience, digital-led advisor connects, and robo-models for goal-based investments with added options of human advisor interactions. Some of the advantages of the hybrid model are as follows:
- Access to a broader client pool, market segments and new revenue streams through digital ﬁrst, real-time, low-cost access to advice
- Focus on understanding the more complex ﬁnancial planning needs of the customer while the core investment portfolio and other middle and back-ofﬁce processes can be addressed by the robo-advisory solutions
- Integrate human advisor insights and inputs into the investment process to assist with portfolio rebalancing decisions
- Pricing for the digital advisory could be modularized for value-added services like tax loss harvesting, new investment products, and portfolio review by registered advisors
2.2 Role of technology across various touchpoints in enhancement of robo-advisory
The below ﬁgure shows the various touchpoints of robo-advisory across the wealth management value chain with future potential for technological improvement.With the advancement of technology in areas such as advanced analytics, artiﬁcial intelligence
(machine learning) and natural language processing, the effectiveness of robo-advisory is set to increase. This will enable robo-advisors to have higher impact across the value chain further strengthening the value proposition.