As robo advisors sprout across the retail investing landscape, opinions vary whether these online upstarts pose a true challenge to traditional advisors or if established wealth management firms can maintain their comfortable hold on the advice market.
With technology change now unleashing new opportunities and disrupting existing wealth management business models, and demographic shifts expected to enrich and empower millennial investors, both traditional players and their robo advisor rivals should review their strategies to survive or thrive in the years ahead.
Although the profile of robo advisors has skyrocketed recently, they’ve been a slowly rising force for at least five years. They saw the opportunity to take algorithm-based portfolio management - long employed by traditional firms – and create low-cost online portfolios that appeal to tech savvy consumers, with minimal involvement by a human advisor.
Robo advisors have won praise for applying ‘customer-friendly’ technologies to reach the under-served segment of younger or smaller investors who large wealth firms often ignore. As such, robo advisors are well positioned to win their share of the anticipated wealth transfer to millennials from their baby boomer parents.
While robo advisors’ recent growth is impressive (estimated at US$5 billion in assets under management), it remains a fraction of the $18 trillion retail investment market. This leads critics to surmise that independent robo advisors face a tough uphill climb to challenge industry giants with massive financial resources and wider product and service suites. For example, US-based Charles Schwab launched its own robo advisor service in March, with attractive, low, or no advisory or account fees or commissions. Other big players such as Fidelity and TD Ameritrade have signed deals with leading robo advisors to serve their clients on a white-label basis.
Although some observers state that independent robo advisors still hold the upper hand - since big players lack genuine interest or tech expertise to succeed in the niche - the current wave of imitation and alliances by big firms casts some doubt on whether independent robo advisors can protect their turf.
This flurry of activity in the advisory market raises strategic challenges for both traditional money managers and the upstarts, the robo advisor rivals.
More than “six clicks or less” differentiation: With robo advisors in the spotlight, their current business model is at risk of rapid duplication. By solely promising fast, low-cost access to conventional exchange traded funds, a robo advisor offering can be replicated quickly by any large firm that builds or acquires an ‘app’, leading to commoditized pricing.
Instead, robo advisors could achieve true market differentiation by developing unique products or proprietary investment strategies not found elsewhere, potentially in the emerging areas of peer-to-peer lending, crowd funding or foreign exchange-linked products. By doing so, they can create valuable intellectual property, with a high barrier to entry for competitors.
Bulk up the brand: Robo advisors still lack sufficient brand awareness to build market share and scale, but the example of PayPal shows how aggressive marketing can create a household brand overnight. Beyond bigger marketing budgets, shrewd independents could also court influential investors, from the likes of Warren Buffett to colossal pension funds, who could quickly bolster robo advisors’ credibility and asset base.
Growth through partnerships: Although robo advisors’ single purpose makes them agile and efficient, it could also limit their ability to grow, since clients might seek greater product and service choice elsewhere. A solution may rest with strategic partnerships.
Just as traditional firms are allying with financial technology innovators to add digital options, robo advisors could forge more alliances with financial sector partners to increase their product scope and trade referrals. They could also create peripheral sales forces in new markets through agreements with non-financial firms, through affinity marketing to customer or employee groups, or by partnering with non-competing financial players like online retailers, money transfer or payment services.
While the competition is just heating up, both the ‘challenged’ and the ‘challengers’ should refine their strategies to build their brands, trust and meaningful service differentiation, to prepare for the unfolding digital and demographic wave.