Rise of robo-advisors in mortgage business could have an impact

Although the U.S. dominates the global landscape for automated financial advice by a wide margin, the steady proliferation of increasingly niche startups has made this space ripe for consolidation, especially as many robo-advisors struggle to turn a profit and cement their place in the face of the high costs attached to acquiring and retaining clients, according to a recent report from London, U.K.-based research firm Burnmark.

The U.S. has at least 200 robo-advisor firms vying for a share of investors’ assets while Germany is a distant second, with about 31 robo-advisors, followed by the U.K. and China, which each have 20 in operation. Canada, meanwhile, falls somewhere in the middle, with about 12.

Startups that have brokered partnerships with incumbent financial advisor firms stand a much better chance at surviving past their infancy. That’s partly because the cost of ramping up a client base for an early-stage robo-advisor can be steep, the report notes.

Burnmark’s report estimates that a U.S. robo-advisor firm — many of which are set up as a business-to-customer (B2C) operation — would have to spend an estimated US$389 to acquire a new customer. Return on that investment doesn’t immediately take fruit — and that’s if the client decides to stay on long term.

Read: Robo-advisors face challenges

“An average account size of US$27,000 produces revenue of just US$90 a year at a 0.35% fee,” the report says. “Even assuming a high retention rate of 95%, the projected customer lifetime value comes out to only US$217.”

Robo-advisor firms that eventually evolve from a B2C model to a business-to-business platform by partnering or consolidating with a traditional wealth-management firm will face fewer financial obstacles in trying to grow their client population.

In Canada, Toronto-based Wealthsimple Financial Inc.’s ambitious efforts to capture the boomer market in the U.S. are backed by Power Financial Corp., which has a 59.8% stake in the firm and offered it $20 million in new funding for its expansion.

This level of financing has afforded Wealthsimple the opportunity to run splashy, primetime ads in the Super Bowl and the Golden Globes to make its presence known following the firm’s move into U.S. territory in late January.

Traditional wealth managers will rely on “algorithm-powered advice and digital channels” increasingly to complement their offerings as investors look for “micro-personalized products and services,” the report notes.

Whereas some established firms are still mulling the merits of launching their own robo-advisor platform, the report notes, others have used their financial muscle to “undercut” existing competitors. The report cites the efforts of wealth-management firms such as San Francisco-based Charles Schwab Corp. and Malvern, Penn.-based Vanguard Group, which have come up with their own brand of automated advice.

Vanguard’s personal advisor services, for example, gives clients a full financial-planning solution for a 0.30% cost, the report says, a mere fraction of how much an investor would pay for signing on with an investment-only robo-advisor.

As incumbent firms have piggybacked on the trends that robo-advisors have set, some of these startups have begun to see their share of assets under management (AUM) decline. Redwood City, Calif.-based Wealthfront Inc., for example, has seen the pace of its AUM growth slow down to 2% from 6% annually.

To stave off decline or expand their share of the advice market, some robo-advisor firms are diversifying their services in a way that more closely resembles the establishment.

For example, New York-based Betterment LLC has gone from being a pure-play robo-advisor — among the first in the market — to offering those willing to a pay a “premium” rate access to in-house advisors.

Hybrid robo-advisory platforms, in which clients can converse with a human advisor while they receive automated recommendations, are already starting to emerge. Increasingly, wealth managers will have to integrate “algorithm-powered advice and digital channels,” the report notes.

“In our view, robo advice will complement, rather than displace, financial advisors,” the report says. “Hybrid robo-advisory will emerge as a key segment, with some large firms building their own offerings, and some buying independent robo-advisory firms.”

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