How real is the threat of the Robo-Adviser? A look at Australian Robo-Advisers
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It’s the threat everyone is talking it - eliminating the need for the adviser with a robot. A robot that has no conflicts, no bias and charges low fees. But how real is the threat? Some are calling it an opportunity.
Depending on which article you read, the robo adviser is being seen as one of or all of the following:
- A disruptor - removing the need for an adviser
- An enabler - giving advisers more tools in his or her armoury to service clients in a different way or attract those lower value clients they’d usually turn away
- A market-maker - opening up the 80% of the market that has long held the view advisers are too expensive
Venture Capital funds are also getting giddy about it with robo-advice one of the top investment fintech areas in the last two years with more than $US500M of venture capitalist funds flowing into these companies.
In terms of assets under management, as of June last year, approximately $20 billion worldwide has flowed into these newly created robo-advisors, the majority with US based robo-advisors, who have been in the market going on 3 years. There are now 200 robo advisors in the US alone! Australia is very much in its infancy. We look more closely at the Australian market below.
Currently, $20 billion represents 0.08% (yes, you read that correctly) of the US $24 trillion pension marketplace. If the market grows as anticipated to $225 Billion of assets under management by 2020, this still represents less than 1% of current assets under management – consider this against 1 solitary fund manager in Vanguard, who currently have $3 trillion in assets under management. However, some pundits are predicting this to boom to $5 Trillion to $7 Trillion.
The top robo-advisors in the US are listed below. Obviously, there’s a long tail of start-ups that are hoping the market share gets there. Even if forecasts on the upside are correct, the market may only endure a few of these 200 - that’s tough competition, not to mention the money being invested by well resourced and funded financial institutions into this market. We are already seeing some of the early movers being snaffled up by large institutions. It’ll be a white knuckle ride for many of these robo solutions, most will flounder.
The key to survival will be:
- Have an outstanding user interface – if you are trying to capture a market that is only moderately interested in their finances, first impressions last and keep impressing! Tinder-ise the experience - it's the milennials that are the primary market.
- Fee Structures – one of the key differentiators robo-advisers have is their low fee model. If your fee structure is not considerably cheaper than a face to face adviser, then don’t expect to last.
- Collaborative partnerships – Australian companies tend to have this adversity to partnership. The tide is shifting, but in order to give consumers the best product, having 50 ordinary robo-advisers in the marketplace will be a disservice to the consumer and your company (consumers are becoming more and more fickle and less brand conscious). Partner up! As we see, legacy systems can make for a clunky experience and consumers will be far less forgiving.
Citi Research provided a decent SWOT analysis (with some Adviser Ratings flair added in):
The modern portfolio theory (from which robo advice is defined) and technologies supporting this has been around for a while but is now being repackaged given the shake up we have seen in other industries and their ability to encroach on current incumbents with superior product experience – can AirBnB, Uber and AirTasker be applied to Investing? And will a portion of the 80% that have not been engaged, suddenly become engaged.
Some will argue, the aforementioned industries are transactional (ie booking a taxi, hiring a cleaner, booking a place to stay), whereas investing involves science and personality. The removal of human emotion (also viewed as a positive in some respects), the ability to forecast macro-winds or just the human validation that you get from a financial adviser is some of the hurdles robo-advisers have not yet overcome. Who knows - with the advent of artificial intelligence the operating system Jocquan Phoenix fell in love with in the movie ‘Her’ may end up being not just your lover, but your financial adviser.
I believe there is a market for robo advisers, but only the tough will survive. And often the tough come with very deep pockets.
Australian Robo Advisers
Let’s look at the Australian market - we have looked at 7 operational robo-advisers that we are aware of (please contact us regarding those we are missing), with many more in the pipeline. Macquarie, BT Financial Group, Midwinter, Clover and others have already signaled their intention to aggressively target this market.
Check out SLIDESHOW here
As this space grows, we’ll start to incorporate these advisers into our platform and just as we do for human advisers, rate and review them accordingly.
by Angus Woods, MD, Adviser Ratings