Why Pacific Life shuttered its robo advisor

As the competition between independent robo advisors heats up, some automated platforms are struggling to survive.

Swell Investing, a digital investment product focused on impact investing, is shutting its doors for good. Launched two years ago as an affiliate of the insurance company Pacific Life, the automated platform focused on attracting first-time investors with its $50 account minimum and ESG portfolio offerings.

“Although Swell still passionately believes in sustainable impact investing, the company was not able to achieve the necessary scale in the current market to sustain operations,” says a Swell spokesperson in a statement.

The startup had $33 million in assets under management and 14,000 client accounts, according to its most recent Form ADV. Swell is no longer accepting new clients and will liquidate its assets next month. Securities will be held with custodian Folio Investments and customers won’t be charged for transactional fees beginning in August.

“We thank our customers for joining us as we’ve looked to make a positive impact in the world through our collective investments,” according to the statement.

A spokeswoman for Pacific Life declined to provide additional details about the closure, though the company acknowledged the digital ESG advisor wasn’t a “long-term fit” for its business model. Swell also declined to comment on the specifics of the shut down.

However, the robo advisory space is growing. Digital investing platforms are estimated to hold $257 billion in assets, according to research from Aite Group, and is expected to pass the $1.2 trillion mark by 2023. Most robos are owned by parent companies that subsidize the startup, waiting for the day they can turn a profit, says Wally Okby, research analyst for Aite. For robos to survive, investors need to be patient.

“In these amazing bull market conditions, the company couldn’t scale and its funds couldn’t beat the S&P 500,” Okby says. “With ESG investors, they want to see the impact of their investment.”

Despite a bull market, other independent robos have also left the game. In May 2018, digital financial planning startup LearnVest dropped its financial planning to further integrate with Northwestern Mutual. Another robo pioneer startup, Hedgeable, dropped its SEC registration last July after struggling to attract high-net-worth clients.

Chasing smaller sized accounts could have played a factor in Swell’s downfall, says Jason Escamilla of the direct-indexing software firm ImpactLabs. His company had sent customers to Swell if they had small accounts because the accounts were too expensive to manage.

While robos are fighting to lower their account minimums, acquisitioning clients is an expensive endeavor. To be successful, robos have to either scale by cleaning operation costs or acquiring a mass amount of clients, Escamilla says. “These challenges are not new to the robo advisory space. It’s like Lyft where they lose money on every ride.”