A few years ago, the financial world was buzzing about “robo-advisors.” These web sites and smartphone apps were going to revolutionize investing and wealth management. The services start with a set of interview questions, then make investment allocations into various Exchange Traded Funds. By using algorithms to provide rule-based recommendations using low-cost index funds, their hope was to provide inexpensive advice with low account minimums.
The project began in the US, with a couple of independent startups. Soon, most of the major financial companies started either building their own platforms or partnering with a fintech startup to capitalize on the trend. Today there are over 100 different robo-advisor apps and web sites with over $130 billion in assets under management. While that pales compared to the $60 trillion in investment assets in the US, the growth rate is dramatic, and robo-advisors follow the aggregation technology model of digitizing services and distributing them to a mass audience.
Aggregator model. Source: Stratechery
What Uber had done to mobility service and Google to information search and Airbnb to hotels, robos could do to investments and wealth management: redefine, disrupt, and get rich off the distribution. Right?
Only it doesn’t always work out.
Finance is more complicated than buying a book or staying in someone’s apartment when you’re on vacation. People get nervous handing over the bulk of their wealth to a faceless computer program. Young folks may be more willing to experiment, but most of their wealth is human capital, not financial capital. They can – and often do – earn their way out of any investing mistakes.
People with financial capital hire people they trust to help them manage their money, because people trust people – not programs and algorithms. We know that programs and algos are written by people, after all. And clumsy attempts by some financial firms to cash in on the growing robo-advisor trend are running into these marketplace realities and cultural problems with their existing wealth management operations.
That’s what I thought about when I read that UBS – the Swiss banking giant with over 50,000 employees and more than $3 trillion in assets under management – is shutting down the online robo-advisor platform they launched with great fanfare just a year and a half ago. Dubbed “UBS-Smartwealth,” the service only required a $20,000 minimum investment, compared with the millions usually needed to gain access to UBS’s private bankers.
The company’s hope was to attract a broad base of younger new clients to the staid, successful UBS brand – the next generation of wealth. But the effect was to undercut UBS’s existing staff and eat into their margins by cannibalizing their own business. After all, if a client can save tens of thousands of dollars in annual fees by shifting to their advisor’s own online offering, why not switch to a digital platform within the same company? You don’t even need to transfer the assets. And as baby-boomers continue to retire in record numbers, there are a lot of new investors inheriting new money, and a lot of existing financial advisors who are stepping aside. It doesn’t usually make sense for a company to disrupt itself. These human transitions are a big deal, especially in finance.
Source: US Census Department
Robo-advisors will have their place, probably as part of the discount, do-it-yourself financial community. Already, the most successful services are offered by Vanguard and Schwab. But the apocalypse that industry-watchers predicted just a few years ago – that financial advisors would soon go the way of travel agents and radio DJs – hasn’t happened. Just because something’s bright, shiny, and new doesn’t mean it will be successful.
It’s going to be a while before the investment industry is hollowed out by robots.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”