Beyond the Robo-Advisor Hype

The Battle for the Customer and How Financial Institutions are Responding

Robo-advisors like Betterment and Wealthfront made waves within the financial community over the past few years with their automated portfolio rebalancing, modern user interfaces and lower management fees.

Then something interesting happened:

Big banks and large wealth management firms responded by offering their own robo-advisor technology to their clients or announced intentions to develop them.

In true start-up fashion, Betterment expanded its’ product base, offering its’ services to financial professionals. Vanguard and Charles Schwab responded by offering robo-advisory services to their network of investment professionals and were able to quickly capture more assets under management than Betterment and Wealthfront.


In Canada, we’re starting to see the same trends in robo-advisor adoption.

Companies like Wealthsimple and Nest Wealth built low-fee robo-advisor solutions and attracted interest from millennials. Interestingly, Wealthsimple followed in Betterment’s foot steps by first positioning as a direct-to-consumer robo-advisor and expanded its service offerings in recent months to financial professionals.

So Why the Big Interest in Offering Robo-Advisory Services?

Robo-Advisors are filling an Investment Advice Gap.

They offer web and mobile based platform to give clients easy access to a diversified investment portfolio. These services are being marketed as a cheaper and more accessible alternative to traditional financial advisors, based on the low investment minimums and lower fees (typically between 0.15% to 0.40% on total assets under management).

For millennial audiences, this type of technology makes sense because their investment goals are not-as-of-yet specific so it’s possible to offer them a One-size-fits-all solutions by varying the asset allocation percentage as a function of their risk profile.

The business model sounds attractive on the surface until you do some analysis:

According to Michael Wong from Morningstar, Robo-advisors need between $16 Billion and $40 Billion in Assets Under Management to break even based on the lower fees they are charging clients and the average account sizes of their clients (1). Betterment with an average of $28,000 USD (2). Assuming an average fee of 0.25% per annum, that’s $70 earned per client. And now there’s industry research that it can take between $300 to $1000 to acquire a new client (4).

Some firms like SigFig and Hedgeable are claiming that they spend $0 in marketing but this itself is misleading as firms are spending money on value added services at no cost to clients so these development costs are attributable to customer acquisition costs.

The challenges of scaling to profitability are also compounded by being able to retain these clients long enough for the life time value of the customer to be higher than the acquisition cost. So if it’s taking me $500 to acquire that customer, I need to keep them for 5–7 years in order to recoup my cost.

As the competition for assets within the automated direct-to-consumer robo-advisory space intensifies, the clear winners will be the larger institutions because they are better positioned to distribute their products to their current customers and to provide human advice when needed.


Mike Blicker is the Founder of WealthTab (www.wealthtab.com), a financial technology company based out of Montreal. WealthTab helps financial professionals to deliver a better client experience at every step, from the initial client interaction to subsequent monitoring of investment portfolios.

Follow us @WealthTab or on or LinkedIn (https://www.linkedin.com/company/10474977).