Yet another startup? Where there's a will, there's a robo advisor
Market competition and customer acquisition costs be damned. Robo advisor startups continue to launch, despite high-profile flameouts and industry cynicism toward the viability of the independent digital wealth model.
A quick scan finds a plethora of new platforms: Robos for young investors, old investors, rich investors, small investors; robos for Islamic investors, robos for impact investors; robos for Canadians, robos for Asians. Robos have yet to conquer more than a fraction of the overall investment market, but they are already fractured along almost every conceivable retail investment niche.
Even the definition of robo advice expands. Newly launched Tally Advisor will rely on algorithms to help its customers pay down credit cards rather than build a portfolio. "Other companies may be working on automated investments and savings, but Tally Advisor is the first and only robo advisor for consumer debt. We are tackling the most widespread financial issue in the country,” says Tally CEO and founder Jason Brown.
In one study, Deloitte tallied over 100 robo advisors operating globally. Why the constant flow of launches? Robos are still expected to manage over $4 trillion in the next two years, according to research firm MyPrivateBanking.
“The robo advisor market is undoubtedly saturated,” says Kapin Vora, partner and head of North America Wealth Management at Capco. “Nevertheless, robo advisors are entering the market with the hope that they can create a value proposition that is unique to their business and create a niche market for themselves.”
The recent exit of Hedgeable from the robo advice market prompted another round of discussion on the fragility of the independent, purely automated robo model.
“The window of opportunity has passed for new consumer-facing robo advisors not affiliated with a large financial institution,” says Edwin Choi, managing member of Mariposa Capital Management.
“Coming up with a differentiated investment strategy is not enough, as we saw with Hedgeable. It looks like besides Betterment, Wealthfront, and Personal Capital, the remaining robo advisors that thrive will be those backed by a strong brand like Vanguard or Schwab.”
Still, a recent TD Ameritrade survey found a near even split among firms on attitudes toward robo competition as a cause for concern. And young digital advice firms insist they can have enough fuel to keep running.
“We use technology, but are not totally dependent on technology to serve advisors or their clients,” says Scott MacKillop, CEO and founder of First Ascent Asset Management. The two-year-old platform has nearly $140 million in AUM and recently expanded access to advisors in the Garrett Planning Network. “We are not technology people who just showed up at the party and are trying to learn about asset management and serving advisors on the fly as they grow their businesses,” he adds.
Mansi Singhal, co-founder at qplum, a robo advisor which launched in 2016, says it a thinning of the herd among early robo launches is natural since they have been competing with the industry’s biggest brands.
“Most of these robo advisors are merely conduits that are building mass distribution capabilities to funnel a high number of products down the same pipe in the future, just like brokers do,” Singhal says.
“These early robo-advisors seem to be effectively competing with brokers and not with financial advisors. That probably explains why Charles Schwab, Fidelity and Vanguard were the first to come up with their own robo offerings instead of private wealth management groups or big banks.”
Mansi says there’s a positive to the inundation of robos. “A lot of options might appear like they cause choice fatigue for the client, but ultimately, this could mean a healthy, competitive market for the end-user,” she says. “And that is a good thing.”