The success of fintech upstarts has created an imperative for established financial institutions: embrace technology and customer experience innovation or risk losing business.
But fintech success isn’t guaranteed and some institutions are learning the hard way that investments in fintech innovation can fail to deliver the gains expected.
Case in point: banking and asset management group Investec is shuttering its Click and Invest roboadvisor service after reporting losses of £32m over the course of two years. £6m of the loss is associated with the capitalized value of the software Investec created to power the service.
In a statement, Investec admitted “the reality has been that the appetite for investment services such as ours remains low and the market itself is growing at a much slower rate than expected.”
Robo-advisor services offer clients financial advice and investment management with little to no human involvement. As a result, they cost much less and make investment management services that have historically been accessible only to wealthier clients available to a much larger numbers of
individuals. Throw in the fact that robo-advisors often promote their ability to outperform living, breathing financial advisors and it’s not difficult to understand why the robo-advisor market has been incredibly hot.
Robo-advisor startups Betterment and Wealthfront have each attracted hundreds of millions of dollars in funding and now boast more than $10bn in assets. That no doubt has not gone unnoticed by established firms, a growing number of which have launched their own robo-advisor services.
But not all that glitters is gold. An early robo-advisor startup, Hedgeable, last year shuttered its original service and changed direction. And robo-advisors, including Betterment and Wealthfront, have run into problems with regulators in the US for various rule violations.
What’s more, some observers suggest that robo-advisors, especially the upstarts, are of questionable viability. According to Simon Bussy, a principal consultant at UK financial services consultancy Altus, robo-advisor services are spending £200 to £300 to acquire a new customer even though the average
customer only delivers £70 a year in fees.
“The problem is that in the UK, on matters of money, people trust banks, they may not like them but they trust them. The incumbent advice firms have the advantage of established brand, customer base and deep pockets,” Bussy told FT Advisor.
This makes sense, but Investec is no startup and it still wasn’t able to generate sufficient interest in its robo-advisor service to make it viable. And it isn’t the only large institution that has had this experience.
Last summer, UBS decided to sell its SmartWealth UK robo-advisor service to a US-based fintech firm after determining that its near-term potential was “limited”.
And just last month, ABN AMRO announced it was shuttering Prospery, a German robo-advisor that also offered personal financial coaching it had launched in December 2017. Like UBS, the Dutch banking giant cited low demand.
At the same time, a number of large financial institutions have apparently had little trouble attracting clients. Vanguard says that its robo-advisor service now has 20m clients and some $130bn in assets under management, making it many times larger than upstarts like Betterment and Wealthfront combined.
It is working to make its robo-advisor technology available to financial planners so that they can incorporate it into their businesses, which could help it grow its robo-advisor business even faster.
Robo-advisor services offered by Schwab and Fidelity are also said to be growing rapidly and have already eclipsed the assets under management of the biggest upstarts, something some industry experts predicted back in 2017.
So why are some established financial institutions succeeding with their robo-advisor investments and others not? One likely explanation is that the firms succeeding were well-positioned to launch roboadvisor services because they already had a large base of clients they could market those services to.
Specifically, firms like Vanguard, Schwab and Fidelity were already focused on offering investment services to retail clients.
Other firms might have retail relationships, but not at anywhere near the same scale and not necessarily of the ideal type (eg. banking versus investments), meaning that large investments would be required to attract clients to their robo-advisor services.
As Goldman Sachs’ approach to building out retail businesses demonstrates, it is possible for large firms that haven’t been retail-focused to move into retail markets, but the fate of the robo-advisor services launched by Investec, UBS and ABN AMRO suggests that some firms underestimated the challenges and costs.
The lesson: while established financial institutions have many advantages that allow them to embrace fintech innovation, sensible go-to-market strategies and marketing plans are required. And in some cases, firms may find that hot fintech trends aren’t a match for their businesses.
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