Despite fears that the growing number of robo-advisors represents new competition that will take food off advisors’ plates, simple math shows that all but the largest and best funded robos face an uphill battle.
Take, for example, the country’s biggest robo: Wealthsimple. In May, Wealthsimple crossed the $1 billion AUM threshold, managing funds for approximately 30,000 clients. That works out to around $33,333 per client on average. Given that the first $5,000 of every client’s portfolio is managed free (except for the cost of the ETFs), that means the average client has approximately $28,333. Wealthsimple charges between 0.35% and 0.5%, resulting in a fee between $99 and $142 per client, for a total top-line revenue of approximately $4.25 million. Meanwhile, around the same time, Wealthsimple’s largest investor, Power Corp., made an additional investment of $50 million.
So what does this tell us? First of all, as simple as robo-advisory looks, software development at scale isn’t cheap. And second, the cost of acquisition of each client (like the commercials during NFL games) isn’t cheap. Ultimately, the only way the math will work is at a massive scale – that is, with a heck of a lot of investors on your platform. That spreads out the costs of the platform so the average cost falls below average per-client revenue.
Given Canada’s size, there really isn’t room for more than a handful of players in this space. So any robo-advisor hoping to act as a stand-alone business better have deep pockets – or a major shareholder with deep pockets. Asthis market matures, it will most likely be the existing financial powerhouses that control the few profitable robos.
Meanwhile, most advisors are missing the two other reasons these new players exist:distribution and infrastructure.
Ask yourself: Who are the biggest roboadvisors in the US? If you guessed the two best known, Wealthfront and Betterment, you are dead wrong. It’s actually Vanguard and Schwab by a long shot. For both of these players, a robo platform simply provides them with a new distribution channel for their core product: ETFs.
Given the rapid growth of ETFs in the marketplace, these highly recognized US brands simply direct new customers to their robo channel as opposed to their DIY channel. The same can be seen in Canada with BMO’s SmartFolio and, to a lesser extent, Nicola Wealth’s Wealthbar. Taking into consideration the economics discussed above, a recognizable and trusted brand that leverages its exposure into a direct-toconsumer channel and gets paid twice (once for product fees and again for the robo fee) reinforces my theory that incumbents and incumbent-backed players are likely the only ones that will survive long-term.
In fact, if embedded compensation gets banned in Canada, resulting in a world where discount brokers offer only F-class funds, you may see other big manufacturers like CI and Fidelity consider a direct model as well.
Over a year ago, I opened a robo account for myself. Using the company’s mobile app, I filled out an investor profiling questionnaire, completed and signed account opening docs, provided identity verification, and sent money to the account – all in just four minutes. I was immediately impressed.
Less than a minute later, I was enraged – not at the robo, but at the fact that for me to open an account for a client on my platform, it requires a mountain of paperwork, hours of labour and sometimes days before we can receive money. I had seen the light – I needed this tech. I immediately reached out and now have a relationship with a robo. That’s the most important reason advisors why should
embrace robos: They will fix our broken world.
Less than a minute later, I was enraged – not at the robo, but at the fact that for me to open an account for a client on my platform, it requires a mountain of paperwork, hours of labour and sometimes days before we can receive money. I had seen the light – I needed this tech. I immediately reached out and now have a relationship with a robo. That’s the most important reason advisors why should embrace robos: They will fix our broken world.
But their influence has the potential to go well beyond their current onboarding, rebalancing and reporting capabilities. Wealthsimple owns and has automated its own custodian to offer a full-stack solution, and Nest was basically built on top of NBCN and other custodians. Both also provide platforms that allow advisors to offer robo portfolios or advisor-built portfolios to their own clients and charge their own fee on top of the robo fee.
Firms are going to have to either license technology from these or other players, or develop their own in-house – or risk losing business and advisors to firms that have it. Robos have set the minimum bar for the future of this industry.
Jason Pereira is a senior financial consultant at Woodgate Financial/IPC Securities Corp., an instructor at the Schulich School of Business and host of the “Fintech Impact” podcast. He will share more of his fintech insights at the upcoming Wealth Professional Leadership and Tech Summit 2018, to be held on May 30th.