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Robo-Advisors Have Yet to Break Even

August 8th, 2019

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Robo-advisors, one of fintech's flashier trends, have yet to pay their way. Even at the typical 0.25% fee, most have yet to attract enough invested dollars to break even, let alone turn a profit.

A detailed discussion on International Banker of the robo-advisor phenomenon leans on an HSBC report on the wealth management industry, which included an analysis of the emerging sector that concluded almost none of the online firms had sufficient assets under management.

The article concedes that "robos continue to offer a simpler, more efficient and more cost-effective way for investors to manage their finances vis-à-vis traditional investment advisors." Then goes on to add, "Such perks for the investor now seem to have transpired at the expense of the robo-advisor’s financial sustainability."

These automated money managers began making an appearance a decade ago, appealing to smaller investors seeking more active account management than with index or mutual funds. That their fees were significantly lower than a traditional fund was an attractive plus. Some of these robo-advisors have minimum investment amounts; many, perhaps most, do not.

Investors who sign-up complete a questionnaire about their financial goals, risk level and other preferences, which are automatically factored into creating personalized portfolios. Algorithms respond to minute-by-minute market conditions to ensure the portfolio stays in balance with the investor's preferences.

The International Banker article says low fees and the small size of each account -- about $24,000 US -- makes it difficult for robo-advisors to break out of the red. The solution is to grow the number of investors or to increase the average portfolio size, a less likely prospect until they establish a longer track record. The difficulty with gaining more customers is that the cost of acquisition is high.

That leaves sector consolidation as a more likely outcome.

“This is a crowded market, and so it is likely that the players able to gain critical scale will act as consolidators,” the HSBC report notes. “The surviving fintech players could then look to IPO or be acquired by one of the other three players.”

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