To robo, or not to robo

That is the (billion dollar) question. Is Robo Advisory all hype, or really the new paradigm for wealth management? Funds are thinking it. VC’s are thinking it. Banks are thinking it. Latest we heard Snapchat has already thunk on it. Consumers themselves are thinking it. Heck, even the Robos themselves are left wondering!

Fat lady has sung

There are quite a few people shouting about how the end is nigh for Robo. Customer acquisition is too expensive. You can’t spend $300 for a customer worth $100. Schwab and Vanguard are driving fees to zero. Robinhood is already free. Robos’ only hope is a fire sale acquisition out of desperation before cash runs out. It’s over! It was fun while it lasted…

The lady doth protest too much

Yet Robo is now more visible and more talked about than ever. So is it dead or not dead?

Short answer: Not dead. You should Robo.

Well, now the consensus is that “hybrid” is the future. Empowering existing human advisors with the tools and automation of Robos. Some even say that Robos will just end up as a lead generation tool for real advisors. Low cost, low value. Because people will always trust people, people will always want to talk to people!

Hurrah, problem solved. End of story?

I don’t believe in hybrid

No. No! There. I disagree with everyone else, including funds, banks and Robos themselves. Why? Because we’ve seen this before. Digital transformation 101. Examples below.

Retail: Surely that can’t work. People will always want to come in and try the goods and kick the tyres, let’s stick to our guns with catalog sales and watch this online shopping fad disappear. We can’t cannibalize our existing channels an a whim. Umm, tell that to Amazon.

Taxi: Surely you need Enterprise IT and proprietary hardware in the car. It will cost tens of millions to build, but that’s the only way to pass the regulations. People will never trust strangers and hop in their car, taxis are a respected institution! Yeah, tell that to Uber.

Hotels: Nobody wants to stay in someone else’s house! People will always value the standards of our brand and the convenience of full service. Tell that to AirBNB.

Entertainment: People will always watch TV, because we curate the content they want. People don’t mind ads, because we only display great products that people need. Okay, I’ll let HBO, Netflix and Youtube know they’re wrong.

It is the inability of an established, entrenched industry to think two steps ahead. No one wants to cannibalize their existing business. They listen to today’s customers, not tomorrow’s customers. They always focus on the obvious next step, and think anything further is simply utopian. Well, it just isn’t. The trend for digital is pervasive, and the transformation will always happen quicker than the incumbents realize. It will be too late for many.

Ask yourself. Do you really think Snapchat and WeChat will have human advisors? Really..?

AUM is not everything

Ah yes, assets under management. Sure, Snapchat has hundreds of millions of customers. But they’re poor people! We at Private Bank> have only a handful of customers, yet manage a lot of billions>. There is no margin below really rich people>.

Yep. The grey suits will continue to serve their clientele of age 70 and above with white gloves. But who cares, really? Does Jeff Bezos worry about Cartier? He’s content to just take most of the retail market. Others can fight for scraps, even if those scraps have diamonds on them.

There is way too much focus on AUM, existing investors and old wealth. The margins will dry out eventually for all but the 1% of the 1%. All money currently managed by advisors amounts to just 0.05% of all the money in the world. Surely there’s plenty to go around?

There is a reason Acorns is suddenly hotter than most Robos. Yes their AUM is pitiful at $156 per customer. Woeful! Only they happen to have more customers than other Robos combined at 700,000. Oooh.

What can you do with 700,000 paying customers? Or rather, what can’t you?That’s the real billion dollar question. That’s where the value is. As an example below, based on online banking startup Simple’s acquisition by BBVA, you can see how monetization makes a bit of a difference in valuations,

So what happens if you take Simple’s valuation per user, and apply it to Snapchat’s user base? Fireworks. Magic.

Long answer: You really should Robo.

Posted first on LinkedIn by Aki Ranin, Commercial Director at Tigerspike

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