Research suggests the fledgling robo-advice market will be dominated by just three to five providers as active managers struggle to turn a profit.
The research consultancy Finalytiq predicts start-up robo-advice firms will “fall by the way side” due to the high cost of acquiring clients and the strength of established passive fund managers.
In its paper, titled ‘Laughing all the way to the bank’, the firm says index fund managers are set to emerge as winners because they will be able to add on between 20 to 40bps to their index funds charges with only a small increase in fixed costs.
It predicts Fidelity – which is planning to launch its proposition Fidelity Go later this year – is most likely to lead the pack, with Vanguard and BlackRock slightly behind because of their lack of direct-to-consumer distribution.
In addition it says despite its strong brand and deep pockets, Hargreaves Lansdown might struggle to break into the market.
The report says: “Costs would have to be lower than its current proposition. Its propensity to push high-margin active funds, rather than low-cost passive, is a big disincentive to entering the robo-advice race.”
Active managers in general will struggle and will need a “significant cultural shift” to cash in, says Finalytiq.
It says: “We don’t see typical asset managers being in a position to cash-in by launching a robo-advice proposition, due to the low-margins and high client acquisition cost typically associated with robo-advice.
“The increasing intermediation we have seen in the last few years means that most asset managers have had little or on direct relationship with retail investors for many years. They have outsourced client services to advisers, platforms and pension providers.
“Many of them don’t even know who the end investors in their own funds are and haven’t engaged with investors for many years.”
The firm adds the trend of established asset managers buying up robo-advice start-ups will continue as the cost of acquisition begins to bite.
In the UK Aberdeen Asset Management acquired Parmenion – which runs robo-adviser WealthHorizon – in September 2015, while in the US BlackRock snapped up FutureAdvisor last year and Invesco bought Jemstep at the start of 2016.
FinalytiQ says start-ups have evolved into “outsourced research and development labs” for traditional wealth managers.
It says: “The cost of client acquisition is one main reason why investment advice is so expensive and while robo-advice start-ups have improved efficiency in the areas of portfolio management, client reporting and the on-boarding process, it’s costing them way more than they have anticipated to acquire clients.”
Finalytiq founding director Abraham Okusanya says: “When the proposals from the Financial Advice Market Review get ironed out, you are likely to see robo-advice propositions growing in the marketplace but not many will be start-ups using new technology, it will be white-labelled propositions taken on by advice firms. There will be a flurry of launches and many of them will fall by the wayside.”
Paul Stocks, director, Dobson and Hodge
Robo-advice is fine for simple things. The minute you get into tax planning or long –term projections, it becomes subjective. It gets messy where things are not straightforward and you become the conscience on the client’s shoulder.
As soon as something complicated comes along I’m not sure how these systems will cope. With all the changes in areas like pensions how will a robo-adviser keep up?