Faced with profitability challenges, robo-firms could move forward with partnerships and specialized strategies
It seems long ago, but not so very long ago, that robo-advisors were billed as an existential threat to human advisors. Today, a digital push is still high on the agenda for the wealth industry, but the prospects of a robo takeover are all but gone — including in the European market.
In a newly released report, Cerulli Associates said that more than half (53%) of European managers that it surveyed have no plans to launch robo-advice services in the next 12 to 24 months. Sixteen per cent said they plan to partner with standalone robo-advisors to offer digital services to their customer base, and just 5% said they intend to build proprietary robo-advice capabilities.
“Our research shows profitability remains the biggest challenge for robo-advisors, with many having failed to gather significant assets under management,” Cerulli said.
One standalone robo-advisor reportedly told the firm that due to high sunk costs incurred in establishing and marketing robo-advice platforms, volume and scale are critical to achieve profitability. But Cerulli cited a review by the U.K. Financial Conduct Authority wherein 57% of investors rejected robo-advice due to low levels of financial literacy, fear of technology, and mistrust of large corporations.
Against that backdrop, several robo advisors across Europe have shuttered their operations, including Amro’s Prospery and UBS’s SmartWealth. Cerulli forecast significant consolidation among European robo advisors, adding that a majority of the European managers it polled held a conservative outlook on the robo-advice distribution channel as they predict limited inflows.
There is likely still a place for robo-advisors, however. Around four tenths (41.2%) of managers surveyed expressed a belief that a sizeable percentage (10% or more) of mutual fund and ETF assets could go to robo-advice services offered by traditional advisors such as independent financial advisors and banks.
“The asset managers we surveyed also believe the main entities to benefit from the growth of robo-advisory services will be gained by direct-to-consumer platforms and banks,” Cerulli said.
Ninety-five per cent of managers reportedly thought direct-to-consumer platforms that adopt robo-advice technologies or services would gain at least some benefit from the growth of robo-advice in Europe, and 89% thought the same for banks. In comparison, 86% thought that fintechs or robo-advisors that operate as standalone companies would see at least some benefit.
Cerulli also reported plans by some robo players to focus on product specialization in areas such as socially responsible investing or thematic investing. Others are looking to adopt hybrid models with a “human touch” to complement algorithm-driven asset allocation.
“Digital advisory services could be most useful to certain demographics such as relatively low-income households, younger investors with smaller assets, or those located far from urban centers,” Cerulli said.