The robo advisor industry is rife with new entrants but the loss of others, begging the question: Are there too many robo advisors?
Several robo advisors recently closed their doors, such as Hedgeable, which had been around for over eight years. WorthFM was a women-focused platform that didn’t make it. These two closures fall on the heels of the recent demise of digital financial planning startup LearnVest, just three years after it was acquired by Northwestern Mutual for $250 million.
Despite such closures, experts believe robo advisors are here to stay. There might not be an over-abundance of robo advisors, but there could be the wrong mix of digital advisors to suit the market.
If the experts are correct, robo advisors will evolve, merge and transform.
[See: 9 Things to Know About Robo Advisors.]
Room for growth in the robo advisor industry. Roi Tavor, co-founder and chief executive officer of Nummo in Zurich, Switzerland, doesn’t think there are too many robo’s.
“Today, we still see less than 100 robo-advisors available in the U.S.,” Tavor says. “Compared to 35,000 SEC registered investment advisor firms and 11,500 banks and credit unions, this is a very small number.”
Niche players continue to enter the robo advisory industry. Blooom is geared towards 401(k) management, while Emperor Investments is a new entrant with stock portfolios only. This contrasts with IncomeClub that is a fixed income only robo-advisor. And Twine, an arm of John Hancock, recently launched targeting investors below age 35. More proof that the robo-advisory industry continues to expand.
Tavor sees further expansion in the robo-advisory sphere in the next five to 10 years. But that doesn’t mean the industry won’t struggle.
Startups fail at a high rate, and there are only a few spots for the leaders. It’s tough to compete with well-established, stand-alone firms like Personal Capital, Betterment and Wealthfront, says Lex Sokolin, global director of fintech strategy at Autonomous Research in London.
High client acquisition costs make it difficult for startups with minimal backing to survive.
Low fees are stifling smaller robo advisors. The issue is not that there are “too many” robo advisors, says Will Trout, head of wealth management at Celent in Houston, Texas. But rather there are “too many robo advisors with non-sustainable business models.”
Robo advisors are dealing with a host of issues including how to differentiate themselves, high client acquisition costs and industry fee compression.
“Monetizing and scaling a robo advisor to a meaningful asset and customer size is difficult,” Sokolin says. “The large incumbents have already caught up, with Vanguard and Schwab leading the robo advisor wave by assets.”
[See: 7 Robo Advisors With a Human Touch.]
The problem for independent robo advisors is that they must acquire customers and outperform the existing players, Sokolin says.
It’s hard for underfunded platforms to compete. If client acquisition costs range from $500 to $1,000 per client, and that client maintains an account of $30,000 for which he pays a 0.25 percent management fee, the math doesn’t add up, says Trout. That scenario equates to a six- to eight-year payback period, which is a tough pill for the little firm to swallow.
Low fees are stifling some underfunded robo advisors’ ability to succeed. Yet, if a robo-advisory firm can establish a unique value proposition and a profitable fee structure, then the niche robo advisor is sustainable, says Cesar de la Cerda, founder of EnvisionVest in Houston, Texas.
The robo advisor of the future is a hybrid. Russ Blahetka, founder and managing director at Vestnomics Wealth Management Campbell, California, sees the robo advisor becoming more of a “tool for independent advisors to offer cost effective services to smaller investors,” and predicts a hybrid model of robo advisor-plus-financial advisor will be the future of the industry.
Stand-alone robos like Ellevest, Personal Capital, Betterment, Wealthsimple and SigFig already provide access to human financial advisors. And many of the robos from big investment houses do the same.
Tavor expects the business-to-consumer model of business to move toward the business-to-business standard. “Instead of building their own digital infrastructure and offering, investment firms will purchase a white-label solution provided by BlackRock’s FutureAdvisor, SigFig or other similar firms,” he says .
The artificial intelligence, actively managed robo advisor qplum’s founder, Mansi Singhal doesn’t believe consolidation and closure equals the end of robos. She sees expansion of the industry along with a new wave of AI-supported robo advisors.
Robo advisors won’t go extinct. The fact that robo advisors are here to stay is good news for investors.
“A lot of options might appear like they cause decision fatigue for the client, but ultimately, this means a healthy and competitive market for the end user,” Singhal says.
[See: Artificial Intelligence Stocks: The 10 Best AI Companies.]
As with any competitive market, there are bound to be those that fall by the wayside. The robo advisors that survive will have large numbers of clients or the support of a financial firm where cross selling is available, Stuller says.
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Are There Too Many Robo Advisors? originally appeared on usnews.com
