As we come to a close on our Robo advisory blog series, we’ll focus today on the murky future of the early business-to-consumer Robo platforms and their chances for survival. Now that the industry has woken up to their early attempts at disruption and some have responded with potential category-killing answers, it will be interesting to see what their futures unfold.
At the time of their emergence on the scene, the main advantage for first-moving firms, such as Betterment and Wealthfront, was a sleepy wealth management industry with a legacy of being slow to adopt consumer technologies. As we’ve discussed, Robo advisors do have features, client benefits, and strategies that advisors can leverage to grow and enhance their businesses
This fact spurred headlines in mainstream and tech sector media praising these new entrants as industry darlings and disruptors that would take down stodgy Wall Street. It would be “Uber for financial advisors as taxi drivers” and the end of financial advisors as a viable business model.
While the early Robos had a first mover advantage, the market underestimated what would happen when they targeted a slow moving, but already tech savvy industry, particularly the big online financial services’ brands (eg. TD Ameritrade, E*Trade). These already Internet Giants watched from afar. They let Wealthfront and Betterment prove out an online advice model, and then pounced. The big brands quickly realized that the barriers to entry were extremely low – all you needed was an interface, an algorithm, a friendly broker dealer, and voila, you were in the Robo business.
It took Schwab and Vanguard all of a few weeks to eclipse Wealthfront and Betterment in total Robo AUM, something that took them years to achieve, and the Giants have been dominating ever since. Schwab’s “free” Robo promises to put even more pressure on the B to C Robos, exposing their economics that attracted hundreds of millions in VC investments. In order for a B to C Robo to break even, they need to get to upward of $40 billion in AUM, and spend hundreds of millions in annual advertising dollars to attract and retain those assets.
At only $2.5 billion in half a decade for each of them, the head scratching begins and the patience of VC money will be put to the test. Brad Mathews, CEO of advisor-friendly Robo platform Trizik writes in Financial Planning magazine, “The biggest financial firms simply have too many financial resources and technology know-how to allow upstarts — well-funded though they may be — to undermine what has become a core business and earnings stream.”
Despite the challenges early B2C Robos may be realizing up against Internet Giants, there are still many things RIAs can learn from what the Robos have brought to the wealth management industry.
“As tenuous as the direct-to-consumer model is, one fact is indisputable — digital wealth advisory services are here to stay,” Mathews concludes.
Therefore, it would be wise for advisors to embrace these new technologies to ensure their long-term sustainability, else possibly risk the fate of the travel agent, movie rental store operator, book seller, music store, photo film manufacturer, taxi driver – the list goes on and on. Be sure your name is not added to this list.
Timothy D. Welsh, CFP® is President and founder of Nexus Strategy, LLC, a leading consulting firm to the wealth management industry, and periodically blogs for Advent’s On Point blog. He can be reached at email@example.com or on Twitter @NexusStrategy.