My colleagues Tadas Viskanta and Felix Salmon have each written about the robo advisors who’ve been raising assets of late (albeit in very small portions, by and large). Wealthfront, Betterment, SigFig, Personal Capital and whichever one sprouts up next month all have slightly unique business models but, in general, they are offering professional-caliber portfolio management services to the masses and basically charging next to nothing.
For the investor, it’s easy to set up, cheap to maintain and relatively unintrusive on an ongoing basis.
1. I think the investment management styles these firms preach are reasonable and probably better than what most investors can do on their own. It’s nice to see a mass-market wealth management product or service that’s not out to gouge anyone or take advantage of the less savvy.
2. This can be a decent business but there’s probably not enough room for more than one or two of them. The race is on to scale up.
3. They are raising money a thousand dollars at a time. It will be tough for them to bring in a lot of large accounts because wealthy people know the value of having trusted accountants, lawyers and financial advisors working for them. They are glad to pay if it means personalized advice and being able to get someone on the phone. For the mass market, however, good human advisors are financially out of reach and lecherous brokers (who will sell a product to just about anyone) are not a good alternative. That is the space these robo advisors will be able to take over – and their true competitors are the online brokers, not traditional wealth management firms.
4. Fidelity or Schwab will probably buy one of these companies or will launch their own version to kill them all, if they see real traction (and profits) in the space.
5. All of these companies look as though they’ll become crazy-profitable on paper (and the VCs are probably convinced of this) but in the real world they are going to have to staff up substantially with human financial advisors and this costs a lot. Margins will be nowhere near projections.
6. The ready-made, disciplined, low-cost, hands-off portfolio model makes a great deal of sense in a bull market. So long as everyone’s statements show a chart moving from low-left to high-right, no problem. But in the next stock market downturn, many of the investors in these services will require some hand-holding and an email blast simply won’t cut it. As a result, behavior will be atrocious and there will be tons of selling out at exactly the worst time. Behavior is more important than fund selection and no one’s taking advice from a software algorithm in a panic. One bear market will reveal exactly what this business model is really able to cope with – my sense is that they’ll be hiring the same kinds of call center advisors and clerks that every other large financial firm needs. Or their investors will be hanging themselves, metaphorically speaking.
7. At the end of the day, those clients of the robo advisors who prosper most in life and business will eventually amass too much money and leave for a real human advisor. In this way, Betterment and Wealthfront will always end up catering to a relatively small median account size, no matter how well their portfolios do or how great their user interface becomes. It is a fact of life and an indefatigable feature of human history that people who’ve accumulated wealth – kings, princes, warlords, emperors, despots, businessmen, entrepreneurs, inheritors, lottery winners, executives, etc – will always seek out counsel, advice and assistance for the maintenance of their money and the continued assurance of their standard of living. In this way, even the most satisfied customers of the robo advisors cannot be counted on to stay past a certain point of asset accumulation.
Overall I think it is good that these firms exist and their services will be worthwhile for disciplined investors who don’t have a lot of money and don’t require much attention on an ongoing basis. But if I were an early-stage investor in these companies, I’d be asking myself about what the true addressable market size and opportunity is here, given the real-world limitations outlined above.
What are your thoughts?