The entrance of another low-cost digital advice offering from Schwab demonstrates a peril for any provider trying to eke out a position in the digital wealth management market: offering advice cheaply isn't going to be enough to stay competitive.
But the premise was flimsy to begin with, says Uday Singh, a partner at the financial institutions practice of AT Kearney.
“There isn’t a no fee or low cost model that is sustainable,” Singh says.
Research by his firm and others points to an unavoidable dilemma — every digital advice firm needs to grow continuously, and fast. Scale, however, requires spending money on marketing and client acquisition costs, which can run up the numbers.
“Every time you buy television advertising that is mass marketed nationally, or in the New York area, there’s robo advertising in every third taxi cab, that’s something that can’t be sustained with a low fee or no fee model,” Singh says.
So, who’s footing the bill?
For now, venture capitalists are stuck picking up the marketing tab, Singh says. Yet valuations are so high that robos are not attracting enough buyers to bail the early investors out. Thus VCs are stuck holding the “hot potato,” Singh quips.
In other words, the race to the bottom doesn’t work. And by itself, cost as a factor might not be enough to lure the masses of clients robos need to break even.
In the future, the wealth management client may look different than what you'd expect.
“They’re all so inexpensive,” says Dan Sondhelm, marketing consultant and CEO of Sondhelm Partners. But “it’s not like the lowest price robo advisors are going to win. Investors will consider, ‘Which one do you like the most? Which one resonates with you?’”
As a result, there's already too much choice within the tiny corner of only $61 billion within the wider $37 trillion space of the wealth management market, says Bill Winterberg, founder of advisor tech blog FPPad.com.
"It's typical for financial services: the more choices there are, the more investors fear making a bad choice, so they stick with what's familiar, which is a big household brand," Winterberg says.
HYBRID OPPORTUNITY
Schwab's launch of a hybrid robo option as a second digital platform underlines the best choice for digital providers.
According to an AT Kearney survey, 28% of mass affluent investors, or those with over $50,000 in household investable assets, will switch their main advisory model in the next five years. Their dominant choice is to switch to the hybrid model.
“Most investors want to work with a firm that has a digital platform and also offers access to a financial advisor as needed,” Singh says. “That’s the model where you can justify the fees.”
The hybrid robo services industry is projected to grow to $3.7 trillion worldwide in 2020 and $16.3 trillion in 2025, making it 10% of the total investable wealth market, according to MyPrivateBanking.
"The more choices there are, the more investors fear making a bad choice, so they stick with what's familiar, which is a big household brand."
Hybrid advisors are still better off putting a retainer model in place, experts say.
“No matter how many clients you have, you can charge a retainer and get paid,” says Raef Lee, managing director of the SEI Advisor Network.
He’s seen retainer fees for as much as $150 to $400. Once the client reaches a certain threshold, they switch back to the classic AUM fee model. For the small advisor, this is the best way to go, he says.
So-called micro-robos like Stash and Acorn have been successful with their retainer models. The mobile-only Stash has a minimum deposit of $5 and will keep its services free for three months. After, it will charge $1 month for account balances under $4,999 and 25 basis points for account balances over $5,000. Acorn offers the same pricing model.
NICHE TARGETS
Some hybrid advisors have targeted niche groups. They’ve built platforms geared toward specific groups, like millennials. Wealth manager Bergan KDV launched digital platform Lifewise for young professionals.
Others are doling out targeted marketing content, sending e-newsletters or starting podcasts to build an audience and share content. By following where the content is going, it can generate leads, Lee says.
You’ll also see some sophisticated asset managers getting into the space that can start charging an asset management fee.Providers such as Hedgeable and Insight Advisors offer their customers access to alternatives.
“The main draw of any investment advisor is who has the best offering, best performance, that’s risk adjusted, low cost, tax efficient and has a beautiful user interface,” says Meb Faber, co-founder and chief investment officer of Cambria Investment Management.
Cambria Digital Advisor offers Cambria Investment Management’s portfolio of ETFs on its digital platform for a fraction of the cost. Touting no management or commission fees, the firm does ask its client to dole out 15 basis points to Betterment for using its platform. It uses value and momentum tilts and active trend following strategies.
-
Massachusetts securities authority goes further than SEC or FINRA in its examination of automated advice.
April 1 -
Regulators should step up their inspections of digital advisers as these tools surge in popularity, the firm said.
September 12 -
A new FINRA report warns firms they should be ready for reviews on their use of digital investment advice tools.
March 15 -
Investment professionals foresaw the greatest risks in flawed algorithms, according to a global survey.
May 4
The firm launched its digital platform and plans to focus on their own client base. Experts say that’s a smart move.
“The best business model is to have a proprietary client base that’s going to open accounts,” Sondhelm says. He cites the success of outliers like Vanguard and Schwab, which have a massive brand and customer base that they can leverage.
People are not searching the web, finding an advisor’s website and opening an account, Sondhelm says. The main reason for an advisor to build a digital platform is for its existing customers. Otherwise, it takes serious marketing and branding to convert leads to clients.
Digital firms trying to survive should shore up their war chest because they will need to market themselves to attract clients, Singh recommends. He also advises firms should be lean and avoid startup excesses.
“Don’t get too greedy." Singh says. "Get a good price for what you have in assets and then use it to monetize."
