In light of the news that WorthFM, a robo-advisor geared specifically toward women, closed its doors only after a few short years, and New York-based Hedgeable just announced it was closing its investment management portal, our industry should begin wondering if we have hit “peak robo.”
Interestingly, the news around robos has tapered as of late, and the fixation on rapid growth has turned to different benchmarks. What should still be provoking thought is how we as an industry are tracking certain statistics differently than before.
In short, the robo-advisor craze hit an all-time high a few years ago, with a great deal of industry analysts and media focusing on the expected growth of these companies. All of the projected charts and data showed a significant increase in assets under management, a true barometer of success, and even more importantly, the only way to remain viable (by way of a recurring-revenue model). Remember, robo-advisors charge approximately half the cost to manage assets — roughly 50 basis points versus a traditional 100 basis points by an advisor — so AUM volume is paramount to their success.
Fast forward to today and what we see reported is not AUM growth, but account opening growth instead. Why has this stat changed? There really is one reason, which we should all watch closely.
Curiosity opens accounts, but does not drive funds
In short, what we are seeing in “account opening growth,” and models that project this rapid growth, is nothing more than the curious investor that has no real plans to invest. While this might seem a bit speculative at first, if one truly understands this market, it begins to make sense. Many robos that have seen an increase in account opening are experiencing nothing more than that — curious investors checking out the various options to how they can personally invest and manage their retirement accounts.
Anecdotal evidence suggests that many early investors open up accounts at a handful of electronic investment advisors before they settle on one, if they ever do. In other words, many of the accounts opened at robo-advisors are actually dormant and in many cases, completely empty. These accounts stay this way, completely abandoned, and essentially increase the costs of the robo-advisor to maintain these accounts while not seeing any profit from the AUM-based model. Quite the quandary.