Why robo-advisor revolution isn't over

New conflict is brewing, warns wealth tech pioneer

Why robo-advisor revolution isn't over

Roughly a decade since robo-advisors first challenged the traditional wealth industry, it seems the duel between advanced technology and professional talent has been settled. But a new conflict is brewing, according to one Canadian wealth tech pioneer.

“In the past, it seemed like it was going to be a battle between technology and the established industry,” Randy Cass, founder and CEO at Nest Wealth, told Wealth Professional. “Now, it's going to be a battle between the firms that adopt the technology within the industry and the firms that delay or don't.”

Compared to the feverish pace of growth it saw in the mid-2010s, momentum in the robo-advice space has slowed considerably over the past few years.

According to data from Investor Economics, which focuses on 15 robo-advice firms, the Canadian robo-advice space experienced a growth rate of 60% from 2016 to 2019, including quarterly growth rates of 12.5% in assets. Today, quarterly asset growth has moderated to just eight to nine per cent. IE also found that as of September 30, 2022, robo advisors in Canada collectively had $18.6 billion in assets, while full-service brokerages and online brokerages had $1.6 trillion and $682 billion, respectively.

It's a clear case of David versus Goliath – except that’s not how Cass sees it. Rather than just looking at the assets within upstart robo-advice firms, he argues people should consider how wealth management at large has changed to include more digitized onboarding, digital account opening, and offering digital means for portfolio selection.

“The trend is accelerating among the firms where clients have been historically, and continue to be today,” he says. “The challenger brand growth might have slowed, but the digitization of the industry has accelerated and continues to accelerate in 2023.”

Cass sees the rise of the robos playing out differently compared to how people imagined it before. The initial theory that advisors would be replaced by automation and robo advisors hasn’t proven itself out, he says, partly because many pure-play robo firms couldn’t sustain their blitzkrieg strategy to capture market share.

“It was an incredibly expensive business model [considering] the customer acquisition cost of going after each individual investor and trying to build a challenger brand – both from a regulatory as well as a customer service point of view – while providing them with lower fees and a better experience,” Cass says.

Still, there’s no denying the more hybrid feel across the wealth industry today. From Nest Wealth’s perspective as a B2B provider of robo advice solutions, he sees growing momentum in the number of digital account openings by clients of traditional firms.

“We’re in three of the Big Six banks in Canada, and in some of the country’s largest and fastest-growing wealth management firms,” he says. “Quarter over quarter, and year over year, there’s a real acceleration in the number of accounts opened through digital channels, with clients still engaged and provided services by an advisor.”

Notwithstanding the momentum in digital brokerages and self-directed investing, clients at wealth firms have not let go of their interaction with traditional firms. That connection gives them a degree of comfort through both good and bad times, which Cass believes clients are not willing to give up.

But there are echoes of the robo advisor revolution in today’s investor preferences. Surveys of what clients look for when choosing a wealth firm or moving to a new one, he says, shows digital technology – for onboarding, communication, and performance reporting, among other areas – has become table stakes.

“When you look at where the growth markets are within the industry, they’re really at an asset level below where they’ve been before,” he says. “The revenue per client isn't going to be as high … as a firm, you won’t be able to scale your business, reduce your servicing costs, and satisfy regulatory requirements with your legacy infrastructure.”

The name of the tech game for many wealth firms today, he says, is to become more efficient, strip out costs, and increase scalability. Eventually, they’ll be able to overcome their margin compression challenges and address clients’ increased expectations – but they can’t stop there.

“The next stage is for firms to incorporate technology as a foundation under their advisors, which will let them provide vastly superior value,” Cass says. “It really is going to be the differentiator between the firms that survive and the firms that don't.”