Automated advisers: short circuit Premium
Further takeovers are likely, as long as bidders believe savings will outweigh prices
Robots may well conquer the world. Established businesses may first conquer the robots. That bodes badly for the independent future of robo-advisers, start-ups attempting to automate investment advice.
Autonomous Research estimates robo-advisers spend at least $500 to acquire just one new client. Assuming an average annual charge of 0.25 per cent on assets of $25,000, it would take eight years to break even on the cost of client acquisition alone.
Private valuations of big US names in robo advice, such as Betterment, Wealthfrontand Personal Capital, reflect tech sector froth more than the dull realities of retirement planning. Wealth managers are often valued at about 2 per cent of their assets. Thus $6bn of assets under management suggests a worth of $120m for Betterment. A funding round in March valued the company at $700m.
Big fund managers and insurers, such as BlackRock and Northwestern Mutual,that have bought into this buzzy sector, are likely to have done so at high rather than low multiples. They usually aim to integrate technology into existing products. They hope to cut servicing costs, particularly on small “orphan” accounts whose owners take little interest in them. Automated advice to these customers may permit big financial groups to discharge their duty of care more efficiently.
Further takeovers are likely, as long as bidders believe savings will outweigh purchase prices and robo-advisers go on shouldering steep costs to garner customers. Independence has certainly proved heavy going for Nutmeg, a UK online wealth manager, whose most recent accounts showed steep losses.
Acquirers from the financial sector are less willing than venture capitalists to burn money on marketing. Robo-advisers still hope to reach a tipping point where their services will appeal to a mass market, not just early adopters. But slow progress towards this goal suggests their efforts to become disruptive big businesses are suffering a short circuit