Half a dozen possibilities in automating asset management

By Efi Pylarinou

In an earlier post on Daily Fintech, titled “Fintechs chasing the Unadvised assets that are up for grabs” I addressed the issue of the current margins in the automated robo-advise business. The numbers reveal that there is actually a great potential to grab currently “unadvised assets” that are in the trillions.

However, the current fees charged (25bps for robo-advisors 1.0) are very low to support a standalone business. VCs are currently funding such growth but the business model is not sustainable. I totally agree with April Rudin, who shared her thoughts in an article titled “Ask Chuck? How About Ask Schwab’s C-3PO?” earlier this month: “It all boils down to AUM and whether the disruptors can gather billions of AUM to make the business meaningful”. In addition to the back of the envelope revenue calculations that show a low margin business, it also seems that the cost of customer acquisition is not negligible. The growth rates necessary to lead to a profitable business are in the neighborhood of hundreds of millions AUM increase per month.

Therefore, these businesses will have to:

  • Grow substantially in terms of AUM, to the trillions; with the issue being “what is the customer acquisition costs of the business strategy?”
  • Or partner with incumbents and use their trusted brand names and distribution channels. Like Fidelity who recently, partnered with Betterment on the B2B front, offering online tools to their financial advisor network. A May Morningstar report supports this scenario as mentioned in Robo-advisers will struggle to make profit, says Morningstar and states that robo-advisors need $16 billion to $40 billion of AUM at a fee of 25 bps to achieve break-even. Profitability calculations will have to take into account customer acquisition costs that vary.
  • Or shift to the “adjacent” markets: from pure online advice (robo-advisors 1.0) to more sophisticated (robo-advsiors 3.0 with more products beyond basic asset allocation to few ETFs) and also to hybrid services (partly human); that would allow higher fees.
  • Or separate investment management services that are being commoditized and focus on profitability in the areas of financial and estate planning like Personal Capital
  • Or get rid of the proportional fee model that has been the norm in the asset management business as Blake Ross suggests and reinvent a new business model.
    • A free service of online financial advice that charges fees for life insurance of the customers; ala Zenefits (Free to use HR software that is upsetting the health insurance brokers) maybe?
    • Or similar to the new SigFig model that after 7yrs and more than 3 major business strategy mutations, now offers portfolio analytics and risk management for free and then charges for investment management?
    • Or extracting value and ROI from the data collected by managing assets 100% for free?

Which business model or models will survive the work-in-progress in the space of automation in investment management: The standalone; the hand-in-hand; the hybrid services; the flat fee; or the freemium?

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