Originally published by Cuffelinks
Mainstream media loves to publish articles about how roboadvice is the future of financial advice, especially in the face of the horror stories exposed by the Financial Services Royal Commission. The stories unveil the exciting new wave, the independent disruption and the better online solution that will revolutionise advice. The effusive articles often feature photographs of robots, proving an enthusiastic graphic designer has missed the point. A decade after the start of roboadvice, we are breathlessly told its time has come.
Roboadvice is a broad field, covering many types of automated investment services. It is supposed to be the antithesis of the traditional financial advice model, which is replete with high fees, poor communication and conflicts of interest. The doubtful qualifications of some advisers adds to an image of an industry ripe for the picking.
In reality, roboadvice is struggling to make a meaningful impact, and market penetration is largely confined to millennials or younger who do not yet hold significant wealth. In any case, most of them would rather own a home than an ETF. Many of the more established players are introducing human advisers to complement the online offer.
At a time when one relatively unknown fund manager can raise half a billion dollars in a month of marketing a Listed Investment Company, it’s doubtful whether the entire Australian roboadvice industry has raised this much in five years.
US robo growth rates heading lower
The great robo success stories are, apparently, in the United States, but leading industry watcher and frequent visitor to Australia, Michael Kitces, wrote this summary in 2016 under the heading, “Robo-Advisor Growth Rates Are Plummeting.”
(Kitces is not referring to long-established businesses such as Charles Schwab (NYSE:SCHW) or Vanguard which have added roboadvice to their existing capabilities, and it’s uncertain how much is a transfer of money within same business).
In May 2018, Kitces gave another reminder of what has been achieved after a decade of roboadvice marketing and strong brand exposure. While the numbers look fine, they should be read in the context of BlackRock managing over US$6 trillion and Vanguard over US$5 trillion (that’s trillion, or one thousand billion). The great disruptors like Facebook (NASDAQ:FB) and Google (NASDAQ:GOOGL) drove a network effect where growth rates rose exponentially for many years.
“The early fear was that robo-advisors were going to replace advisors, at least that’s what the robo-advisors came to market with, saying, “We’re here to replace advisors and do it cheaper.” You know, with frankly very limited growth of robo-advisors, I don’t mean to knock the assets that they built with, you know, companies like Wealthfront and Betterment at $10 billion to $15 billion, but when the total U.S. investable market space is upwards of $35 trillion to $40 trillion, we’re talking about something on the order of 0.06% market share of investable assets. Which means I think we’re past the question of whether robo-advisors are going to replace human advisors in the mainstream. They’re not.” (My emphasis)
I asked Kitces for an updated view for this article, and he replied:
“Through Q2 (latest quarter I can get reasonable data), Betterment was adding about $300M/month, and Wealthfront was at about $170M/month. This is a bit of a lift in total monthly flows than it was in 2016, but on a much larger base. Back then, Betterment adding $150M/month on a roughly $3.5B base, or a monthly growth pace of about 4.3%. Now it’s $300M/month on a $13.5B base, which is only a 2.2% monthly growth rate. Wealthfront is similar; back then, it was as low as $60M/month on a $3B base (2% monthly growth rate), and now it’s $170M on an $11.2B base (growth rate of about 1.5%). So in essence, their growth rates keep grinding lower, although the companies are still about 3X the size they were back in 2016, so the absolute flows have lifted (although both were even higher in 2017, and have actually seen another slowdown in 2018).
In terms of companies that have closed or pivoted, off the top of my head …
- Hedgeable shut down
- WorthWM shut down
- SheCapital shut down
- Jemstep was sold to Invesco
- FutureAdvisor was sold to Blackrock (NYSE:BLK)
- Upside Advisor was sold to Envestnet
- Vanare/Nest Egg pivoted to advisors (now AdvisorEngine and funded by WisdomTree)
- SigFig is partnering with wirehouses
- Betterment launched its own advisor channel.”
Hedgeable was not a recent entrant. It started in 2010, and when it closed, it held US$80 million for 1,700 clients at a 0.75% fee. This is a scale business. LearnVest also closed in June 2018 but has since reopened as a provider of financial education material.
In the UK, UBS announced it would close its SmartWealth roboadvice business, launched in 2016 and intended to be rolled out in many countries. The potential of the business was “limited”.
Kitces’ list illustrates the other great hope of many roboadvisor startups: not that they will independently revolutionise financial advice, but that a large competitor will buy the business and become a strong partner with an existing client base.
Many Australian players, not many assets
This article is not a review of the entire Australian roboadvice industry. Although they do not all call themselves roboadvisors, occupying similar spaces are Stockspot, Clover, Six Park, Spaceship, Zuper, MapMyPlan, SuperEd, Decimal, QuietGrowth, Raiz (formerly Acorns), InvestSMART, Ignition Wealth, Balance Impact, Plenty, Grow Super, Superstash … to name many. It’s a highly competitive space raising millions in startup capital.
The vast majority of these businesses do not reveal the assets they manage. Most are startups burning cash each month, relying on optimistic investors for ongoing support. A few will be rewarded but most must pivot to something else, pack up or find a buyer rather than remain independent. Their valuations are not determined by profit, as there isn’t any. Rather, they must demonstrate blue sky and an exponential growth path. Just don’t mention the terrifying CAC – the Cost of Acquiring a Customer.
In its Annual Review of the superannuation industry in 2016, SuperRatings awarded QSuper’s Money Map the prize for the Best New Product/Innovation. It was an “online financial advice tool” with a single online dashboard allowing members to track their finances. From 1 September 2018, the product was closed.
BigFuture was a runner-up in the 2015 Afiniation Showcase for the Best Robo-Advice service in Australia, but it abandoned its direct offer in May 2018 (see following interview).
In February 2017, Westpac wound up its BT Go-invest roboadvice product launched in 2015 with four model portfolios, after finding it unviable, although BT is pursuing consumers directly with Panorama.
In 2017, Macquarie Bank shuttered its OwnersAdvisory service, following the tragic death of John O’Connell, the executive who was driving the roboadvice initiative.
Decimal is listed on the ASX and has built technology to add digital advice to financial products. It has been adopted by some major super funds. It recently announced:
“At the end of 2017 the Board formed a view that the existing ‘direct to customer’ sales approach was leading to a prohibitively high cost of customer acquisition and moved to develop indirect channels and routes to market, for smaller deals and customer segments, while maintaining direct sales for larger opportunities.
The outcome of these discussions, both comprehensive and broad, is the recent announcement of the Binding Proposal for Sargon Capital Pty Ltd to acquire all of the shares of Decimal for a consideration of 1.41 cents per share.”
Here is the share price movement of Decimal (AX:DSX) since 2014:
Source: Yahoo (NASDAQ:AABA) Finance
For a listed company operating in what is supposed to be a new frontier, profits are elusive. Its shares have traded below 1 cent having been 30 cents less than five years ago.
Australian pioneer in online investing, Stockspot, has enjoyed a high media profile since its launch in 2014, supported by $5 million in funding from backers including ETF Securities’ Graham Tuckwell. Stockspot does not release figures on its funds under management, making it impossible to monitor its progress. CEO Chris Brycki provided this comment:
“The first phase of B2C robo advice (both here and overseas) has been focused on process automation, educating consumers and simplifying the customer experience to reduce frictions and give more people the confidence to grow their wealth by investing.
We see the next stage being centered around mass personalisation. i.e. giving clients a more customised experience based on factors like their experience, engagement level, and personal preferences.”
The exit strategies
So we have the four Ps of choice:
- Persist in making the business work before the source of capital dries up.
- Partner with an existing business with a large client base.
- Pivot into a related business where competitive advantages and skills can be commercialised.
- Pack up (or if you prefer, pull the plug), because the business cannot find a market or a partner.
Fortunately, for the time being, the venture capital market does not seem overly worried about the fifth P: profit.
But it’s better not to make enemies along the way. After I wrote a review of Spaceship‘s superannuation offer (by the way, they have a significantly improved non-super fund), I received an email from someone working in wealth management. She had been for a job interview at one of the new roboadvice startups. After discussions on positioning the business as fighting the injustices of the superannuation system and its incumbents, she asked about the exit strategy for the business. How would the value of the equity offered in the remuneration package be realised? Without hesitation, the recently-minted CEO said he will sell to a major bank. So much for hating the pernicious ways of the old guard.
As she wrote in her email about the CEO, “He’s developed a bit of an ego about not being part of ‘your industry’ which I had a fight with him about … I told him that the minute he picked this industry, he was also a part of it.”
Interview with early roboadvisor, BigFuture
In Part 2 of this look at roboadvice, we interview the CEO of BigFuture, Donald Hellyer, on why his business pivoted away from its ‘direct to consumer’ (B2C) aspirations, and what it has become.
Graham Hand is Managing Editor of Cuffelinks. Disclosure: Graham is on the Investment Committee of ethical roboadvisor startup, Balance Impact.