Go back a few years and robo-advisors were the talk of wealth management. Panel discussions were often dominated by the prospects of robo-advisory, but nowadays they are rarely mentioned. What happened to the robo-advisor hype?
There are still many robo advisors still going strong. Platforms like Moneybox and InvestEngine are proof the space is still alive – although it is worth noting neither platform explicitly describes themself as robo-advisors. Allied Market Research even claims that the robo-advisor market will exceed $41bn by 2027, growing at a CAGR of 31.8% from 2020.
While that is the case, there are warning signs that the sector is not as game changing as people had predicted. One of the biggest shocks to the space was the collapse of UBS Group’s $1.4bn buyout of robo-advisor Wealthfront. This was the second time UBS’ efforts in the robo-advisory market were dashed. Its first foray in the space was through its SmartWealth solution which it sold to SigFig in 2018 after noting the near-term potential of the platform was limited.
Another recent ripple in the robo market was the sale of BlackRock’s direct-to-consumer robo-advisor FutureAdvisor to Ritholtz Wealth Management. Many industry experts saw this sale as a sign of the end of standalone robo-advisors. Speaking to ThinkAdvisor, Nexus Strategy founder, president and CEO Timothy Welsh said, “I think it is the final nail in the robo-advisory coffin. If a firm of the size, strength, brand and reach of Blackrock couldn’t make it work, then no one can.”
So, if there is still an opportunity for robo-advisors, why are they not as popular anymore?
A cause of their fall from grace could be their lack of use cases. Fredrik Davéus – founder and CEO at Swedish financial analytics API developer Kidbrooke – said, “Robo only works in niche customer segments, which is why I think they’ve had challenges growing over and above their initial fan base of early adopters.”
Another issue Davéus highlighted is that many of the robo-advisor tools are not really adding anything to the overall offering. “Not even cost efficiency once they grew to a certain size and had to take on all of the fixed costs of running an investment business.”
The final reason for the dip in the market could be that they are primarily aimed at younger investors, who currently have less wealth than older generations or other investor groups. Davéus said, “The real meat in the market is in the mass affluent space. But here you have to make sure you add value and not only compete on price.”
Millennials and Gen Z are tech savvy and are keen to use digital services that give them control of their finances. A report from Vanguard claimed that Millennials are twice as likely as older investors to consider using a robo-advisor. But until the generational wealth transfer, the Millennial market is less attractive to investment firms than older generations.
This does not mean focusing on younger generations is a waste of effort, capturing them early can ensure loyalty for when they inherit that wealth. This is something many traditional wealth advisors need to work on. A report from Ernst & Young claimed that 70% of women and Millennials and Gen Z investors are likely to fire their family’s advisors when the wealth transfer comes their way. While they might not like their traditional advisors, they could still simply move to a digital advisor platform.
Will there be a resurgence?
One of the biggest trends across many industries is the desire for personalisation. Customers want to feel like they are not just getting a one-size-fits all approach and want to feel a business is catering to their specific needs. This is especially the case within wealth management.
Many robo-advisor platforms will provide a customer with a range of portfolios based on their preferences, but beyond this they still lack that personalised approach. However, the accelerated development of generative AI tools, like ChatGPT, could help them implement better support without needing to bring in human advisors. These tools could allow customers to ask questions about the market, get detailed information about their portfolio and more.
Davéus said, “I think it will allow firms to add natural language features into their user interfaces, but more importantly it will enable smart players to create less linear and more intuitive and interactive user experiences.”
However, whether this will spark a complete resurgence for robo-advisors, it is hard to know. One point Davéus does predict is a greater focus on automation within wealth management.
He concluded, “Automation will increase throughout the industry so it will be in use across firms and lines of businesses. I don’t think the one trick robo firm will be particularly successful. There will be a few niche players who are fully “robo” serving specific segments of the market, much like there is execution only services servicing its specific segments.
“The more exciting development I think are firms that understand that they can generate demand using automated tools which can then be captured across channels and in a non-linear fashion with respect to the customer’s journey from prospect to client.”
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