Fintech on Friday: Finding a way to make robo-advice pay

Robo-advice may be a hot topic in wealth management circles, but, in Europe at least, they have so far struggled to convince customers to invest substantial sums in their online platforms. And even when they do manage to find a foothold, making money is not easy.

The UK’s largest online wealth manager Nutmeg disclosed to the Financial Times it has doubled its customer numbers over the course of 2017 to just under 50,000, while assets under management passed £1bn ($1.4bn) for the first time. Yet despite those impressive numbers, the company is yet to make a profit.

Building a direct to customer (D2C) business is very hard in any industry, but the challenges are particularly acute for robo-advice platforms, explains Robby Hilkowitz, chief executive officer of Israeli-based H2 Private Capital. “I have invested in five of these: one has been successful, one is on its way to being successful, one has been a complete disaster and the other two are kind of in the middle.”

It takes huge amounts of capital to build a D2C business from scratch, he warns. “I can’t tell you how many business plans I have seen which tell you they will get to $5bn AuM using just SEO and fancy internet advertising. It just doesn’t work like that. It requires tens to hundreds of million dollars worth of capital, and real world advertising.”

A number of robo-advisers have begun as D2C businesses, then tried their hands at becoming business to business (B2B) companies, before “flipping back” to D2C, says Mr Hilkowitz. But many of these early stage companies fail to realise the two business models are very different.

“The difference between D2C and B2B in robo-advice is not just a difference in distribution, it is a completely different business. In D2C you are talking about an asset management or wealth management business, whereas B2B is really a tech business dealing with partners.”

Europe vs US

Only a few European robos have managed to break through the €50-100m level and really start to provide their services more broadly, says Adam French, co-founder and CEO of robo-adviser Scalable Capital, with many struggling to acquire sufficient numbers of customers. “It is not cheap for any business to form a direct relationship built on trust with an end investor when you are talking about dealing with their money,” he warns.

In contrast to the relatively small numbers of customers and assets under management seen in the European robo-advice arena, the US market has a number of players, such as Betterment, Wealthfront and Personal Capital, who have managed to scale their offerings up. But the US market is also several years ahead of Europe’s says Mr French.

“Betterment and Wealthfront were founded between 2008 and 2010, while the earliest European robos were in around 2012. So if we look at the current trajectories, we are neck and neck with some of the US players.”

Yet those looking to bring robo-advice to the European market also have to overcome some additional headwinds, he says. “This is a market which started later because it is much more complicated, with different tax regimes, currencies, languages and so on. To build a product which can scale across Europe, it actually takes a lot of effort just to get the thing going.”

The marketing budget that is needed to launch a robo-adviser from scratch is huge, but if a there is already a client base is place things get much easier, says Iwan Schafthuizen, managing director business development at Ortec Finance, the provider of technology and advisory services for risk and return management, which give the incumbent banks looking to branch out into robo a big advantage. But it can be a real struggle for these traditional banks to digitalise, he says. “It is not a question of whether they should do it, it is how they should do it that is the challenge. Making a robo within such organisations is quite a struggle.”

He gives the example of ABN Amro in Germany, which after struggling for two years to transform itself, eventually decided to set up a new digital bank, Prospery.

There is no doubt that the incumbent banks need to enter this space, argues Mr Hilkowitz at H2 Private Capital, or else they will end up being relegated to being the “utility plumbers” of the financial services industry. “You’ll have smart fintechs or other companies coming in and managing these client relationships and capturing all the good revenues.”

Winner takes all

But the jury remains out on whether the incumbents will manage to successfully launch their own robo-advisers to corner the market, or whether the start-up will manage to take hold. “You are seeing some of the incumbents trying to get into the game. But they are terrible at adopting this technology. There are very few examples that I have seen of incumbent banks making a reasonable job of this.”

Can the start-ups get the clients they need before incumbents get their platforms ready and can compete? That race may have started, says Mr French at Scalable, but it still has a long way do go.

With more and more players competing in this arena, new entrants will have to offer something unique to get noticed, he says. “When I look at the new robos which are launching, we keep on seeing the same proposition with new front-ends. You need more than that.”

And this is an area in which the traditional banks have an advantage, believes Mr French, because they hold a lot of customer data. “They know a lot about you. If they can combine that with robo, then that is exciting. They can seamlessly provide you with something quite personal. Banks have a great chance with all that data.”

Indeed the future for some start-ups in this space may well lie in partnering with the traditional banks. He explains how Scalable is hedging its bets by both approaching clients directly, and using its technology to “empower” financial institutions, giving the example of its partnership with ING. “We are looking to do more white-labelling in certain markets, so we don’t care who wins.”