Advisor threat doomed to fail

New research suggests traditional advisors have nothing to fear from robo-advisors – despite the millions of dollars now pouring into Canadian operations.

Advisor threat doomed to fail

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.”

The recent $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.”