Rise of Robo-advisory
- Robo-advisors have emerged to deliver wealth management customers certain benefits over traditional service models, including greater affordability, a digital-first nature, and greater customisability
- Besides these advantages, robo-advisors have enjoyed a series of favourable structural growth drivers: (1) availability of un- / under-served smaller assets under management (“AUM”) clients; (2) growth of index investing; (3) rising smartphone penetration; (4) sentiment shift; (5) user-friendliness; (6) low balance requirements; and (7) low fees
- Thanks to these tailwinds, robo-advisors globally had amassed 293 million users, managing USD 1.4 trillion in AuM
Subsequent Pullback
- Despite strong top-line customer growth, there are several roadblocks facing disruptor robo-advisors, including shallow client relationships, a lack of active investments, and a strong comeback from legacy peers
- This is reflected in the robo-advisory AuM leaderboard, with three legacy peers occupying the top spots, dwarfing the AuM gathered by new-age challengers
- Other innate drawbacks that have caused new-age robo-advisory firms to fall behind include superficiality of client relationships and lack of active investment avenues
- To address these challenges, robo-advisors have attempted to offer hybrid customer interaction models, more active investment avenues, and forged partnerships with traditional players
Economic Feasibility
- The median robo-advisory customer is being acquired for an eye-watering sum of USD 470, with an average per annum maintenance cost margin of 0.52% of a client’s AUM
- In fact, 98% of robo-advisors have fewer than USD 15 billion in AUM, indicating that consolidation may be on the cards for the industry
- Moreover, most robo-advisors are generating revenue yields <1%, a figure that’s smaller than that of their traditional peers, weighing on profitability
The Path Forward
- Robo-advisors should look to vertically streamline their customer acquisition, asset gathering, and revenue generation processes
- In addition, they may horizontally expand through offering B2B WealthTech solutions to traditional players, digital enablement of traditional human advisors, self-led brokerage, and digital banking services via partners
- When reviewing their strategies, robo-advisors need to be cognisant of the five steps that make-up the wealth management customer journey: (1) customer acquisition (i.e. lead generation, marketing & engagement, and customer onboarding); (2) needs modelling (i.e. customer profiling, target identification, and risk assessment); (3) investment solutions (i.e. product sourcing, recommendation, and subscription ); (4) portfolio management (i.e. portfolio construction, maintenance, and reporting); and (5) customer maintenance (i.e. push and pull engagement)
