Are Traditional Providers Finally Taking the Robos Seriously?

A recent article in the trade press about RIAs creating (and even seeking to white label) their own “robo” platforms underscored concerns I’ve had about around the automated investments business for some time. I see three major headwinds facing the automated advisors, particularly those primarily serving investors directly (my editorial commentary in italics).

• Costs of customer acquisition are high. At what point are the venture capital backers going to want their more half billion dollars back?
• Revenue models are low.It’s hard to make money when you are charging less than 25 bps on assets.
• Barriers to entry are few. Combine the ability to code and decent investments savvy and you have got the skeleton of a robo. Then it’s off the see the deep pocketed panjandrums of Silicon Valley.

I’ve said before that consolidation is around the corner, be that from a market correction or escalating pressure on fees. In the meantime, it would not surprise me at all to see one of the larger automated advisors seek to cash out and sell to a wirehouse or major custodian. Granted, a buyer might find the price tag hard to stomach, but for the first mover, strategic concerns may trump financial. To the bold go the spoils, and the traditional high cost advisor based model is becoming increasingly unsustainable. The desire to efficiently serve a less affluent market is one reason Charles Schwab built its Intelligent Portfolios platform. Why wouldn’t a broker/custodian take a cue from Schwab and buy a high profile robo that it can plug directly into its advisor network?