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
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
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 1%,>
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)
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