As money continues to pour into the seven robo-advisory firms operating in Canada a leading investment research firm suggests traditional advisors have nothing to worry about. Here’s why.
“We see the economics of standalone robo-advisors as challenging, and believe that few will be materially profitable and still standing several years down the road,” says Morningstar’s latest report addressing the proliferation of robo-advisors, or digital investment services, in the U.S. “The current legion of standalone 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.”
$30 million investment by Power Financial in WealthSimple, the Toronto-based robo-advisor, was the first shoe to drop in what’s expected to be a rapidly consolidating industry as it becomes clear that only a few of these digital investment services have the financial wherewithal to survive in this increasingly competitive financial services marketplace.
Morningstar estimates that robo-advisors operating in the U.S. will need between $16 billion and $40 billion in assets under management in order to break-even and it’s possible that even that won’t be enough to deliver profits given the advertising dollars required to attract new clients.
The market for robo-advisors in Canada is far less mature than that of the U.S. As a result it’s fair to say that similar, if not worse, market conditions exist north of the 49th parallel.
Globally, robo-advisors are expected to accumulate $20 billion by the end of 2015. That sounds like a lot until you consider that Canada has approximately $2.5 trillion in managed money.
“While the break-even point looks small compared with the overall addressable market,” Morningstar explains, “the robo-advisors have penetrated only a sliver of that market despite being in business for years.”