Why are Robo-Advisors still not popular?
Some products are better as features, not standalone businesses — and Robo-Advisors, in my opinion, fall into that category. The largest Robo-Advisors (Nutmeg and Moneyfarm), despite being in business for almost a decade, are still struggling to climb above the $10bn Assets Under Management (AUM) mark.
While Robo-Advisors offer benefits like automation and diversification, they’ve failed to gain mainstream traction. Why? Because better alternatives exist, and their business model simply doesn’t scale well.
Robo-Advisors are nothing special (anymore)
There are three “benefits” of investing via a Robo-Advisor: Personalisation, Diversification and Automation. To determine your portfolio, they use a short questionnaire to assess your risk tolerance, investment horizon, and financial knowledge. Based on your profile, the Robo-Advisor builds a portfolio of low-cost index funds or ETFs, and periodically rebalances it. For example, if your target allocation is 60% stocks and 40% bonds, the robo will adjust your holdings to maintain that ratio. Sounds great, until you do a double-take.
Personalisation? Superficial at best.
A few multiple-choice questions hardly provide a full picture of someone’s financial situation. Human advisors, even entry-level ones, ask far more detailed questions to tailor investment strategies. Robo-Advisors, by comparison, offer generic portfolios disguised as “personalised.”
Diversification? Easily done elsewhere.
Diversification can also be achieved without a Robo-Advisor. One can buy the individual ETFs that Robo-Advisors hold directly from other investing platforms or brokerages. Although there are some funds that are only available to financial advisers (like those from Dimensional Fund Advisors), Robo-Advisors platforms are unlikely to have access to those because of their low AUMs.
Automation? No longer unique.
Additionally, even the “Automation” benefit is diminishing as investing platforms and asset managers are rolling out similar products. Trading212’s Pies allow investors to pick ready-made portfolios or build their own, set up regular investments and leave the rebalancing to Trading212. Vanguard and Blackrock also have similar model portfolios like the LifeStrategy Funds.
Robo-Advisors are losing their Product edge and their other useful features (like analytics, report generation, forecasting etc.) will soon also be copied…
An failing business model and shrinking market
Beyond product stagnation, Robo-Advisors are suffering from fee pressure and unit economics that don’t work. The largest ETFs from Blackrock and Vanguard today are charging only a few basis points (some Banks and Asset Managers are so desperate for market share that they are offering ETFs for free). In what world would a rational investor pay 0.75% in fees, on top of the ETF management fees, to use a Robo-Advisor?
The popularity of low-cost brokers and commission-free investing would drive down margins of Robo-Advisors further. The UK Robo-Advisors like Nutmeg and Moneyfarm are still making huge losses from their filings, their negative margins will be even more negative as these pricing pressures increase!
Besides fees, there is also a very obvious ceiling for the target demographic of Robo-Advisor users. The target users are likely those with assets less than $100k (approx). Beyond this amount, users would likely become smart enough to shop around for cheaper alternatives (or do it themselves) or have their needs evolve that they require professional help from an actual financial adviser. Robo-Advisors are losing to traditional asset managers and advisors at the affluent segment of the market, while being out-competed by neobrokers who offer commission-free investing and a sexier UI.
Is there any hope for Robo-Advisors?
In the investing space alone? Probably not. Investing has become a commodity. Prudent advice is freely available online, and retail investors now have easy access to low-cost, diversified portfolios. The only path to profitability at scale is by:
- Earning interest income on idle user cash,
- Leveraging bulk execution savings, or
- Charging subscription fees for value-added tools.
The better bet for Robo-Advisors may be to evolve into personal finance platforms — tools that integrate budgeting, spending, saving, and investing in one place. This opens the door to new revenue models, like tiered subscriptions, and serves the segment traditional advisors ignore.
But even that space is ultra-competitive, and in developed markets like the US, UK, and Europe, the future looks bleak without a radical product rethink. Robo-Advisors are at risk of becoming a relic, slowly being relegated to a feature and not a product.
