A new report says robo-advisors are no flash in the pan but a durable feature of the global wealth management sector, with offerings proliferating rapidly.

(An earlier version of this item appeared on WealthBriefing and Family Wealth Report, sister news service to this one.)

The robo phenomenon is “here to stay” but many such firms, particularly those with shortcomings in the areas of onboarding and client assessment, will not survive as competition intensifies in this nascent sector, a study warns.

“The number of offerings is growing faster than clients’ willingness to shift enough assets to them to make them economically viable,” said Francis Groves of MyPrivateBanking Research, which analysed around 70 robo-advisors in 13 countries for its report, Robo Advisors 3.0 - How to Develop Robo-Advisors that Win and Keep Customers.

“The real danger is the cost of acquiring an individual client exceeding the revenue generated from an account over periods of several years,” said Groves, a senior analyst at the Swiss firm. But how can firms assess how their strategy will play out?

“The robo-advisor development is too new to have the 'perfect' solution yet and as a consequence wealth managers have to be willing to adapt their strategies over time,” MyPrivateBanking analyst Steffen Binder told this publication. “Therefore, it will be important to measure success objectively. KPIs in areas such as clients per advisor, client satisfaction with services, margins per client and onboarding times need to be employed and monitored constantly.”

While the average onboarding time at the robo-advisors studied was a swift 15 minutes, the firm cautioned that such a “strong focus” on client acquisition runs the risk of “too shallow collection and processing” during this crucial process. In other observations, it said only a third are using aspects of behavioural finance in their client assessments, and that just 20 per cent provide support outside of office hours. Other weaknesses identified were the underuse of artificial intelligence, as well as “very low” provision of mobile apps. Meanwhile, client authentication was almost universally by e-mail address and password - a worrying finding at a time of increased focus industry-wide on the protection of client (and firm) data and funds.

The phenomenon of the "robo" advisor has become a major area of debate in wealth management in recent years; a number of firms employing automated asset allocation settings, based on a client's stated risk preferences and investment goals, have risen to prominence, such as with Nutmeg in the UK or Wealthfront in the US. 

Stand-alone versus hybrid models
The biggest concern clients have with “stand-alone” robo-advisors is the question of whether they will still be around in a few years, and if they can trust the processes at these firms, Binder said. Clients of wealth managers with hybrid solutions, meanwhile, are most worried that advisors might take less care and rely too much on online tools, he added.

“Stand-alone robo-advisors which offer a clear client onboarding journey, robust assessment and sustained high quality comment and investor education are here to stay,” Groves said. “Nevertheless, the long-term prospects of hybrid robo services, which add a substantial human interaction component to the automated client advisory process, are greater than the long-term prospects of stand-alone robo-advisors.”

Asked whether end-clients generally understand the differences between stand-alones and hybrids - or indeed if they even know what the term robo-advisor means - Binder said the wealthy have become much more informed and sophisticated in their selection for services and providers in recent years, and are also willing to try different routes.

MyPrivateBanking believes the idea that wealthy investors are always looking for complex solutions is a misconception, he added. “This explains why this group and the technology-savy millenials are right now most open for robo-advisor services.” Indeed, according to previous research by the firm, wealth managers need a strong set of digital capabilities aimed specifically at super-rich investors in the increasingly fierce battle for clients in this segment.

MyPrivateBanking made a number of recommendations as competition and scrutiny heats up in the space, including: ensure that the USP enhances the firm's appeal in the market, rather than narrowing down the number of potential clients who might be interested in the service; prepare to be in the regulatory spotlight to a “vastly increased extent” by boosting the rigourousness of client assessments; and invest in mobile for both portfolio reporting and client onboarding.

Wealth managers should see the robo-advisor trend as a chance to become more cost-efficient by, for example, increasing the number of clients they serve per advisor - but at the same time better serving new and existing ones, according to Binder. However, he cautioned that wealth managers should “keep a cool head”, and think carefully about how their service should look. “It should not purely be a standardised add–on. Each wealth manager has to think ahead about what solution works best with its type of clients, qualification of advisors and technological capabilities.”

The research is based on an anlysis of 73 “active” robo-advisors globally: 28 in the US and Canada; 35 in seven European countries; and 10 in the Asia-Pacific region.