Is it over for the direct-to-consumer robo advisor?

It’s sure starting to look that way, despite the phenomenal success of the early robo advisors.

As Morningstar pointed out in its recent report, the economics of the direct-to-consumer robo business model are simply too skinny: "We see the economics of the stand-alone robo-advisors such as Betterment and Wealthfront as challenging, and believe that few will be materially profitable and still standing several years down the road." 

Morningstar’s analysis confirms our own experience for a different reason.

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. 

As the largest banks, brokerages, wirehouses and asset managers begin offering digital investment advisory services, they will blunt the threat from stand-alone robo advisors and maintain their existing, significant market share. 

That’s bad news for most of the robo advisors, whose business models are predicated on taking market share from the industry’s established players.


As tenuous as the direct-to-consumer model is, one fact is indisputable -- digital wealth advisory services are here to stay. That much is clear.

Wealthfront, Betterment and Personal Capital have all proven the model beyond a shadow of a doubt. Consumers want digital investment advisory services because of their low cost and convenience.

Because of that success, the rollout of digital investment advisory services will only accelerate as the biggest players kick into high gear. Large financial firms have determined that a digital wealth advisory platform will improve the productivity and profitability of their national network of financial advisors.

For RIAs, it’s important not to misinterpret the shifting landscape in the early innings of the robo movement. Many RIAs have been actively rooting against the robo advisor because they believe it will hurt their business. 

In reality, RIAs have an opportunity -- just like the largest institutions -- to use digital wealth advisory tools to augment their business and be more profitable. RIAs can use digital wealth advisory services to serve clients who are beginning to accumulate wealth. This can be a very nice complement to their existing business.


The Morningstar analysis noted that the business of aggregating consumer assets with such low fees is inherently difficult.

“Robo-advisors will have to use much of the capital they raise to pay for the tens to hundreds of millions of marketing dollars needed to gather assets and reach a profitable scale,” Morningstar said. “Even after they become profitable, their slim operating margin and low average account size imply that it could take a decade or more to recoup advertising costs.”

To survive, stand-alone robo advisors will need to transform themselves or partner up with others in the space. “The current legion of stand-alone robo-advisors will have to invest heavily in advertising, or consolidate to gain scale, be acquired or partner with established brokerages, or go out of business,” Morningstar wrote in its analysis.

If the robo advisor is such a good idea, why have the biggest firms been slow to embraced it?

It’s true the largest financial institutions have been caught off guard by the success of the early robo advisors. That’s normal when innovation disrupts the status quo. Change often surprises the incumbents.

To their credit, the industry has moved quickly beyond whether a robo advisor is a good idea. They’re now true believers. It’s just a matter of implementation.

Many of the largest players are convinced not only because of the early robo advisors, but because of the success of institutional players such as Charles Schwab.

Schwab’s digital wealth advisory solution for retail investors has been an instant hit.  Since the retail service launched in March 2015, Schwab has accumulated $2.9 billion in assets.  (Betterment and Wealthfront have AUM of about $2.4 billion each.) In June 2015, Schwab launched a digital wealth advisory service for the 7,000 RIAs it serves as custodian.

A key reason why firms like Schwab and Fidelity are moving quickly is that they now understand that robo technology is fundamentally changing the cost equation of the wealth management business.

Robo advisor technology improves advisor productivity by offering a back-end functionality that automates 80% of the routine tasks performed by advisors. That includes online account opening, portfolio management, securities trading, rebalancing, compliance reporting and client billing.

In short, robo advisory services allow institutions to scale their wealth management business online and make it more profitable. 


Given that consolidation is common after a burst of industry innovation, we wouldn’t be surprised if some of the early movers do come together.

What we don’t expect to see is early robo advisors licensing their software to the largest banks, brokerages, wirehouses and assets managers. Stand-alone robo advisors are asset aggregators. So are the largest financial firms. They’re direct competitors.

If stand-alone robo advisors were to license their software to institutions, that would be the certain kiss of death. In fact, stand-alone robo advisors are turning down requests for their software from the largest institutions.

Both individual investors and the industry are indebted to the early movers. The innovators have brought fresh thinking to an industry ripe for change. They have created more cost-effective options for investors. 

Whether they will be around to see the full robo revolution remains to be seen. Our view, like Morningstar’s, is that the landscape will look quite different sooner rather than later.

Brad Matthews is CEO of Trizic, which provides enterprise-class software for the nation’s largest financial institutions and Registered Investment Advisors.

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