ROBO-ADVISORS, BACK TO THE FUTURE

Wealth management: Reloaded

Two years ago the asset gathering and investment service industry seemed to be on the brink of a possible disruption by new digital players.

The commission pot, that is keeping the banking sector profitable (in many countries in Europe), seemed to be at risk of being attacked by new entrants, promising very lower costs, ease of use and also better returns. Media were covering the phenomenon daily, some very big deals (Blackrock with FutureAdvisor, Schroeder with Nutmeg, …) kept everybody’s attention in the sector. Regulators, too, especially in UK, were very interested in the development of a low cost advisory service for the less wealthy part of the population.

LET’S JUST STOP FOR A MOMENT AND LOOK AT WHERE WE ARE NOW

For a start, we’ll look at the new fintech (so called) entrants:

• Asset gathered. They must gather a few tens of billions, at least in the US. The biggest robo-advisor, Betterment, has a little more than 16 billion USD with 540.000 clients (ca. 30.000 USD per client). Is that a lot? Is that enough for a profitable business? Actually, most of these assets were raised under a pricing policy whose maximum price was 15 bps. So, if every asset is priced at that point, the revenue stream will be of about 24 mil USD. The company has 245 employees in NY (excluding clerical workers). With an average salary of 90k USD per year (for fintech companies the range is actually between 100 and 145k USD/y2), costs are close to 22 mil USD. Some servers, software and a lot of premium advertisement, and you can do the math.
• Acquisition strategy. The common ground and the main claim of all of robo-advisors is lower prices. At the beginning of 2018, once more the biggest repositioned the pricing of the services to 25 bps (from 15 bps).
• Business focus. Most of them switched from a pure B2C approach to a more cautious and less loud B2B2C approach, offering services to other FIs or FA firms.
• For sure, those who managed an exit and sold to some big incumbent made pretty good deals (FutureAdvisor to Blackrock, Moneyfarm to Allianz, …).

What is emerging is that:

• It is very difficult to acquire clients from incumbents. Despite the drop of trust in the FI, they are still investors’ preferred and safest choice.
• Technology by itself is not a clear differentiator (and it is not rocket-science grade that gives competitive advantage): what is relevant is client convenience over the entire investment journey.
• After those rumbling years, the new service models introduced by robo-advisors are going to be integrated in the line-up of services of traditional wealth managers (such as commercial banks, specialized asset gatherers, private banks, …).
• Focus is switched from client acquisition to:
  • Efficiency or productivity (that must significantly grow in the next few years in Europe).
  • Improvement of the advisory services provided to final clients.

The industry has been very buoyant in the years after the crisis, but the future at least in Europe, will be together on P&Ls. Technology will be an important building block to create new products and services; it will also help to defend prices and scale up productivity of the client serving networks (branches, FAs, …) in term of clients or AUM per financial advisor.

¹ SEC ADV FORM latest submission 17 sept 2018

² https://www.payscale.com/research/US/Employer=Fintech/City/New-York-NY

e * finance consulting Reply is the reply group company specialized in management consulting services for financial institutions. we accompany our customers in defining and implementing their strategic lines through the development of new business and distribution models, the evolution of processes and operating tools and the design of new products and services. more and more often, this means embarking on a digital transformation path that requires the ability to combine industry expertise with full mastery of technological innovation and the ability to make it relevant to the business.