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The 4Ps of roboadvice: persist, pivot, partner or pack up

Mainstream media loves to publish articles about how roboadvice is the future of financial advice, especially in the face of the practices exposed by the Financial Services Royal Commission. The stories unveil the exciting new wave, the independent disruption and the better online solution that will revolutionise advice. The effusive articles often feature photographs of robots, proving an enthusiastic graphic designer has missed the point. A decade after the start of roboadvice, we are breathlessly told its time has come.

Roboadvice is a broad field, covering many types of automated investment services. It is supposed to be the antithesis of the traditional financial advice model, which is replete with high fees, poor communication and conflicts of interest. The doubtful qualifications of some advisers adds to an image of an industry ripe for the picking.

In reality, roboadvice is struggling to make a meaningful impact, and market penetration is largely confined to millennials or younger who do not yet hold significant wealth. In any case, most of them would rather own a home than an ETF. Many of the more established players are introducing human advisers to complement the online offer.

At a time when one relatively unknown fund manager can raise half a billion dollars in a month of marketing a Listed Investment Company, it's doubtful whether the entire Australian roboadvice industry has raised this much in five years.

US robo growth rates heading lower

The great robo success stories are, apparently, in the United States, but leading industry watcher and frequent visitor to Australia, Michael Kitces, wrote this summary in 2016 under the heading, “Robo-Advisor Growth Rates Are Plummeting.”

(Kitces is not referring to long-established businesses such as Charles Schwab or Vanguard which have added roboadvice to their existing capabilities, and it's uncertain how much is a transfer of money within same business).

In May 2018, Kitces gave another reminder of what has been achieved after a decade of roboadvice marketing and strong brand exposure. While the numbers look fine, they should be read in the context of BlackRock managing over US$6 trillion and Vanguard over US$5 trillion (that's trillion, or one thousand billion). The great disruptors like Facebook and Google drove a network effect where growth rates rose exponentially for many years.

“The early fear was that robo-advisors were going to replace advisors, at least that’s what the robo-advisors came to market with, saying, “We’re here to replace advisors and do it cheaper.” You know, with frankly very limited growth of robo-advisors, I don’t mean to knock the assets that they built with, you know, companies like Wealthfront and Betterment at $10 billion to $15 billion, but when the total U.S. investable market space is upwards of $35 trillion to $40 trillion, we’re talking about something on the order of 0.06% market share of investable assets. Which means I think we’re past the question of whether robo-advisors are going to replace human advisors in the mainstream. They’re not.” (My emphasis)

I asked Kitces for an updated view for this article, and he replied:

“Through Q2 (latest quarter I can get reasonable data), Betterment was adding about $300M/month, and Wealthfront was at about $170M/month. This is a bit of a lift in total monthly flows than it was in 2016, but on a much larger base. Back then, Betterment adding $150M/month on a roughly $3.5B base, or a monthly growth pace of about 4.3%. Now it’s $300M/month on a $13.5B base, which is only a 2.2% monthly growth rate. Wealthfront is similar; back then, it was as low as $60M/month on a $3B base (2% monthly growth rate), and now it’s $170M on an $11.2B base (growth rate of about 1.5%). So in essence, their growth rates keep grinding lower, although the companies are still about 3X the size they were back in 2016, so the absolute flows have lifted (although both were even higher in 2017, and have actually seen another slowdown in 2018).

In terms of companies that have closed or pivoted, off the top of my head …

  • Hedgeable shut down
  • WorthWM shut down
  • SheCapital shut down
  • Jemstep was sold to Invesco
  • FutureAdvisor was sold to Blackrock
  • Upside Advisor was sold to Envestnet
  • Vanare/Nest Egg pivoted to advisors (now AdvisorEngine and funded by WisdomTree)
  • SigFig is partnering with wirehouses
  • Betterment launched its own advisor channel.”

Hedgeable was not a recent entrant. It started in 2010, and when it closed, it held US$80 million for 1,700 clients at a 0.75% fee. This is a scale business. LearnVest also closed in June 2018 but has since reopened as a provider of financial education material.

In the UK, UBS announced it would close its SmartWealth roboadvice business, launched in 2016 and intended to be rolled out in many countries. The potential of the business was “limited”.

Kitces' list illustrates the other great hope of many roboadvisor startups: not that they will independently revolutionise financial advice, but that a large competitor will buy the business and become a strong partner with an existing client base.

Many Australian players, not many assets

This article is not a review of the entire Australian roboadvice industry. Although they do not all call themselves roboadvisors, occupying similar spaces are Stockspot, Clover, Six Park, Spaceship, Zuper, MapMyPlan, SuperEd, Decimal, QuietGrowth, Raiz (formerly Acorns), InvestSMART, Ignition Wealth, Balance Impact, Plenty, Grow Super, Superstash … to name many. It’s a highly competitive space raising millions in startup capital.

The vast majority of these businesses do not reveal the assets they manage. Most are startups burning cash each month, relying on optimistic investors for ongoing support. A few will be rewarded but most must pivot to something else, pack up or find a buyer rather than remain independent. Their valuations are not determined by profit, as there isn't any. Rather, they must demonstrate blue sky and an exponential growth path. Just don't mention the terrifying CAC - the Cost of Acquiring a Customer.

In its Annual Review of the superannuation industry in 2016, SuperRatings awarded QSuper’s Money Map the prize for the Best New Product/Innovation. It was an “online financial advice tool” with a single online dashboard allowing members to track their finances. From 1 September 2018, the product was closed.

BigFuture was a runner-up in the 2015 Afiniation Showcase for the Best Robo-Advice service in Australia, but it abandoned its direct offer in May 2018 (see following interview).

In February 2017, Westpac wound up its BT Go-invest roboadvice product launched in 2015 with four model portfolios, after finding it unviable, although BT is pursuing consumers directly with Panorama.

In 2017, Macquarie Bank shuttered its OwnersAdvisory service, following the tragic death of John O’Connell, the executive who was driving the roboadvice initiative.

Decimal is listed on the ASX and has built technology to add digital advice to financial products. It has been adopted by some major super funds. It recently announced:

“At the end of 2017 the Board formed a view that the existing ‘direct to customer’ sales approach was leading to a prohibitively high cost of customer acquisition and moved to develop indirect channels and routes to market, for smaller deals and customer segments, while maintaining direct sales for larger opportunities.

The outcome of these discussions, both comprehensive and broad, is the recent announcement of the Binding Proposal for Sargon Capital Pty Ltd to acquire all of the shares of Decimal for a consideration of 1.41 cents per share.”

Here is the share price movement of Decimal (ASX:DSX) since 2014:

Click to enlarge. Source: Yahoo Finance

For a listed company operating in what is supposed to be a new frontier, profits are elusive. Its shares have traded below 1 cent having been 30 cents less than five years ago.

Australian pioneer in online investing, Stockspot, has enjoyed a high media profile since its launch in 2014, supported by $5 million in funding from backers including ETF Securities' Graham Tuckwell. Stockspot does not release figures on its funds under management, making it impossible to monitor its progress. CEO Chris Brycki provided this comment:

“The first phase of B2C robo advice (both here and overseas) has been focused on process automation, educating consumers and simplifying the customer experience to reduce frictions and give more people the confidence to grow their wealth by investing.

We see the next stage being centered around mass personalisation. i.e. giving clients a more customised experience based on factors like their experience, engagement level, and personal preferences.”

The exit strategies

So we have the four Ps of choice:

  • Persist in making the business work before the source of capital dries up.
  • Partner with an existing business with a large client base.
  • Pivot into a related business where competitive advantages and skills can be commercialised.
  • Pack up (or if you prefer, pull the plug), because the business cannot find a market or a partner.

Fortunately, for the time being, the venture capital market does not seem overly worried about the fifth P: profit.

But it's better not to make enemies along the way. After I wrote a review of Spaceship's superannuation offer (by the way, they have a significantly improved non-super fund), I received an email from someone working in wealth management. She had been for a job interview at one of the new roboadvice startups. After discussions on positioning the business as fighting the injustices of the superannuation system and its incumbents, she asked about the exit strategy for the business. How would the value of the equity offered in the remuneration package be realised? Without hesitation, the recently-minted CEO said he will sell to a major bank. So much for hating the pernicious ways of the old guard.

As she wrote in her email about the CEO, "He’s developed a bit of an ego about not being part of 'your industry' which I had a fight with him about … I told him that the minute he picked this industry, he was also a part of it."


Interview with early roboadvisor, BigFuture

In Part 2 of this look at roboadvice, we interview the CEO of BigFuture, Donald Hellyer, on why his business pivoted away from its 'direct to consumer' (B2C) aspirations, and what it has become.


Graham Hand is Managing Editor of Cuffelinks. Disclosure: Graham is on the Investment Committee of ethical roboadvisor startup, Balance Impact.


The Falcon
December 13, 2018

My issue is ultimately the survivability of the business models, and the changes in strategic asset allocation that will often result in unwanted tax events. Personally I like SixPark of all the Australian offerings, the asset allocation looks solid.

Tunnel Bear
November 16, 2018

LearnVest was NEVER a viable business and burned through cash quickly with high executive salaries and poor financial management. There was NOT one single aspect of the company that was original. Northwestern Mutual Life Insurance Company bought them really for over $350 million and they burned through another $325 million each year after the purchase! Classic case of people who were 160 years behind the times! I was there - I know!

Andrew Varlamos
November 11, 2018

Thanks Graham, for this broad overview.

This first wave of "robo advisers" (robo 1.0) are terrific for consumers who want something very simple: answer a handful of questions and we'll give you a managed portfolio of ETFs. Simple. But also, a commodity; everyone offers the same basic portfolios of ETFs. The user interface might be slightly different, and the relative weightings might differ at the margin, but its a commodity offering.

Which means the price is going to be driven down to very low levels, probably when the big three ETF providers all enter this market, as I believe they inevitably will: Vanguard, State Street and iShares. In fact, I can see a time not too far in the future when you can access such a service for free. As I say, great for consumers!

The other development will be more sophisticated business models, either offering more complex "advice" via technology (see US company, Pefin), or offering choice of different investment manages, each offering a range of managed portfolios. I have been working on just such a venture for the past two years, OpenInvest, and we are launching on 19 November:

We are in the very early days of online investing scenarios, and just as in any other industry, one shouldn't judge the broad sweep of this trend based on the first iteration of technologies and business models.

November 15, 2018

Vanguard already offer a range of diversified ETFs available at a lower cost to all the robo advisers. Its only marketing and a nice app that is keeping ANY flows coming into the roboadvisers.

Pat Garrett
November 11, 2018

Advisors want/need some form of engaging, low cost/low touch service to address a part of the market that they simply cannot service right now. There is also alignment on the SMSF side. This "no viable SMSF under $500k stuff" is really irresponsible data in our view.

I have to admit, hand over heart, that when I wrote the last comment, I included a story and then deleted it as I didn't want you to think I was trying to push too much. The story is of our first $1mm client. She set up a business and then sold it, moved to Sydney and now does a lot of yachting.

Got all her financial affairs in order (with some good advice that she paid for, well worth paying for that advice on that, tax, etc.), and then just wanted help getting $1mm of cash invested in the market.

She explored robo as she has a curious mind and somewhat distrustful of financial advisors on the money management side. Her yachtie friends told her she was nuts thinking about a service like ours. So, she asked them to put forth the two best suggestions in terms of people who would help her invest $1mm. The two advisors quoted her $20-20k/year to put her into a portfolio of managed funds, some ETFs and "some stocks that we'll trade for you, high conviction". She was appalled. At 30bps all in, our fees for her are $3k and she effectively gets asset allocation advice. She didn't believe it. She eventually opened an account, deposited $1 into her CMA, then $100, then $10k (at which point our system trades). She then looked at her portfolio of ETFs, realised she owns the assets, watched for a few weeks, and then put in $1m. She's a very happy client, even more so through two corrections, as we are really front foot when it comes to comms with clients during turbulent times. We have heaps of SMSF trustee clients who also seem to value the same elements of the service.

So now I have just done what I didn't really want to do, which was sound like I'm pitching Six Park to you, but I just have a real passion that this type of service, in some form, is going to be adopted in scale in Australia, but it will take time, and unclear the exact form via alignment with other entities. It will happen in some way, the system is too broken in its current form.

Pat Garrett (Six Park)
November 11, 2018

I really enjoy your articles on robo-advice (I prefer automated online investment management, but that's a mouthful). Your articles are reminders of how hard it is to do what we have set out to do.

It's a tough business model, all too easy to fall into the traps you point out. And as with any hot, trendy space, the heady and painfully unrealistic promises of the early entrants frequently flame out. No $100mm VC war chests over here like the US (and I think that has been a huge curse for the overseas robo's...overcapitalised and overvalued, how will VC shareholders of Wealthfront ever realise value?).

We study and learn from the US market very carefully (and here). I'm an optimist and believe that there is a real need, a real problem, a real addressable market. A viable (financially and functionally) service will emerge, but this will take time.

I think the trick is to align with the slowly emerging group of credible, like minded entities (with complimentary services) that are changing the wealth management landscape, have a great funding base of supportive investors, be prudent with the spend and strategy, and to invest in the functionality and technology that makes 3rd party integrations possible and facilitates the construction of brand, distribution and scale. And demonstrate real engagement with clients, showing better and innovative ways to attract, engage and retain them.

Easier said than done. Patience and humility are learned very quickly in this game, but I'm quite fortunate with the investor group and investment committee that we have assembled.

November 11, 2018

The major issue is that a large swathe of Australian adults, particularly those under 45 who are sensibly pre-occupied with paying off mortgages and meeting family expenses, are NOT ENGAGED with SUPERANNUATION.

ROBO may have limited appeal to tech-heads and people pre-occupied with saving some bps on expenses.

Superannuation is a complicated subject, and calls for expertise, yes ADVICE.

I recently gave a talk to a University of 3rd Age group in the leafy eastern suburbs of Melbourne. One attendee, whom I reckon to be financially astute, came up to me afterwards and said " I didn't know what I didn't know.

Wither ROBO ???

Donald Hellyer
November 10, 2018

People forget that technology only gets better. Its seems the whole wealth management sector who is against roboadvice is betting against technological advancement. Thats a dangerous place to be.

And like a lot of technological advancements, some of the applications being produced will be very useful even if roboadvice fails to take hold.

Graham Hand
November 09, 2018

Here are more numbers from the IMAP Fintech 2018 Conference, quoted by Jamie Wickham from Morningstar. Betterment and Wealthfront have spent up to USD200 million on marketing, the Cost of Acquiring a Customer is about US$1,000 and they charge 25bp. The maths doesn't work. Jamie said he does not think either Betterment or Wealthfront will survive as an independent. These are the two biggest names in global roboadvice.

Michael Kitces
November 11, 2018

Jamie's numbers are incorrect. Betterment’s CAC is substantially lower than $1,000.

While I’m not entirely upbeat about their ability to scale their model to a trillion dollars as Stein once boasted, their unit economics are not NEARLY as bad as Jamie is making them out to be. Especially when coupled to the fact that their average account size is solidly and steadily growing every year (unlike Wealthfront’s, which has declined as they stretched downmarket for more user/investor growth).

I was the first to raise the issue of CACs for robo-advisors back before they even went mainstream (see from 2013 and even from 2011 before the robos fully launched). It is a serious issue. But a CAC of $1,000 was a whisper number once rumored by an analyst who was especially negative about robo-advisors, and it unfortunately stuck. It is not representative of reality, though, at least for the major players here in the US. (Especially as they scale their user base and drive more word-of-mouth referrals from existing users at a substantially lower CAC than cold marketing to the general public.)

If Jamie has a substantive actual source for a $1,000 CAC for Wealthfront and/or Betterment in the current marketplace, I’d be VERY interested to know where/how he sourced the number.

November 08, 2018

5th ‘P’ is Pockets – deep ones – so they can last long enough to be taken over by a bigger fool with deeper pockets!

· If the deep pockets in the US market can’t get any of them off the ground to be profitable, then what will work in our market?

· Its like trying to follow those dot coms 20 years ago. Most will disappear without a trace.

Gary M
November 07, 2018

And when Kogan with 1.5 million users announces a low cost superannuation option in conjunction with Mercer, do these B2C robos let out a collective sigh? I guess we need to see if Kogan can deliver without the usual disguised fees.

Michael A
November 07, 2018

As if to show what a crowded space this has become, another newsletter today includes the following headlines (and none of these businesses are included in your list);

IRESS launches new digital service for superannuation funds

Allan Gray Australia offers superannuation, investment and retirement solutions

GBST goes live with first middle-office Software as a Service

Netwealth launches toolkit designed to help advisers promote innovation in their practices

... plus details of another half-dozen funds launched this week.

We're drowning in choices and new products in the same space.

November 07, 2018

The one missing piece no one writes about is an individual's Personal Financial Management software that holds it all together. Whoever wins at this game controls the primary relationship and hence everything that is sold through there, essentially commoditizing most elements of banking.

Gen Y
November 15, 2018

Agree Andrew. It will be interesting if Open Banking really opens the doors here. To date the inability to get the data out has been a real roadblock


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