Economics

The Death Of Roboadvisors Has Been Greatly Underestimated

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Here’s my call for 2018: Most roboadvisors are going to fail. Read on to see why I don’t drink the RoboKool-Aid that the financial industry and media are serving up.

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See 2017 Hedge Fund Letters.

Roboadvisors
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A little revenue problem?

There is so no such thing as a little revenue problem. If you have a problem with revenue, that’s a big problem.

All the time.

This applies to anyone in any business working in any part of the operation.

Here’s a little secret. Very few roboadvisors have sustainable business models. The industry doesn’t know this yet, because most of these businesses are in their nascent stages. Their owners are still trying to “wait and see.” But in a few years, when the net present value of their projects are still less than zero, they’ll have to send them to the product junkyard.

Here’s the intrinsic problem that very few roboadvisors, only the ones who have billions and billions, are going to be able to solve.

Roboadvisors were invented so that advisors could reach mass-affluent people. I’m really not sure these people are done a favor by roboadvisors.

The average person who uses a roboadvisor doesn’t have enough assets to qualify for a human advisor. Most of these people will do it themselves. There have been easy-access, low-cost products available to them before. Why not just invest in a Vanguard asset-allocation fund? The masses are not going to throw their money into the robo-pit when they already have solutions that offer the same benefits.

The venture capital industry thinks that people with millions and billions are going to invest in roboadvisors. I don’t see that happening. The firms expecting to see big portfolios on these platforms are very naïve.

What this means for the revenue stream is that the margins on these accounts aren’t high enough. You couldn’t scale the business if you wanted to. And that’s okay, because most roboadvisor platforms will never get anywhere. You see that even the big platforms like Betterment don’t have a sizeable portion of the total assets under management globally.

The big firms like Schwab are offering these platforms to their existing clients. What a bad idea. All that does is rob Peter to feed Paul. You’re essentially transferring assets into a lower fee product.

No way to differentiate

As I’ve said before in a bunch of articles I’ve written, the financial advisor space suffers from a deplorable lack of branding. Robos are just another symptom of this illness.

The definition of a roboadvisor is an automated system offered online that provides investors with investment advice with a minimal degree of human intervention. Where’s the branding opportunity? What can you possibly do to set yourself apart? Not much.

Maybe you can do something cute where you say you’re the roboadvisor for gluten-free investors. You only invest in companies who support the gluten-free trend or something like that. Then you have to spend a lot of money marketing to find people in that niche. It’s not exactly playing to the masses.

Read the full article here by Sara Grillo, Advisor Perspectives