Robo-advice businesses must evolve or face extinction, according to Simon Bussy, principal consultant at Altus.
Mr Bussy, who works with robo-advice firms, said many robo-advisers were spending too much money on acquiring new customers to have a viable business model, and the advertising strategies they have used have been ineffective.
He said: "I think the business models of these firms is going to have to change, they are going to have to move away from having a business to consumer model and into being more business to business, and into being technology providers, with their tech enabling the incumbent players, such as banks, to improve their proposition."
Mr Bussy said he knew of one firm that spent £40,000 on a London Underground advertising campaign, and they got five customers from it.
He said: "Robo firms are spending between £200-£300 per customer, to acquire a customer, and the average charge is around 0.7 per cent. The average pot of assets is £10,000, which means they are earning £70 a year from an average customer, so it takes three or four years of revenue just to stand still, and that is before you consider the fixed costs of operating that firms have."
He added: "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.
"The robo advice firms have technology, and I think that is where partnerships will be formed, but not all of the incumbent firms will survive."
He drew parallels with Ocado, an online grocery retailer that evolved by providing technology to other, more established firms in the same sector such as Waitrose, and to online banks in US which, a decade ago, were established to compete with existing firms but were ultimately acquired by incumbent businesses or ceased trading.
He said many robo-advisers had been able to attract funding from investors as markets were rising and interest rates were low but he warned when both of those trends reverse, investors will become more risk averse.
Alan Miller, founder of traditional wealth management firm SCM Private has described robo-advisers as living in a "fantasy world" and called on the Financial Conduct Authority to investigate the business models of the firms.
He said: "UK robo advisers are wired to lose money, and most will go bust before acquiring the sizeable assets under management to ensure their sustainability.
"Surely the FCA and the Treasury should be looking at UK robo-advisers to test whether their financial models make any sense.
"If the answer is no, is it not irresponsible to allow mainly novice investors to have their money managed for the medium to long term, by companies who may well not exist in years to come?"
In a report released earlier this year, the FCA found "several causes for concern" about robo-advice, including concerns that clients were not receiving suitable advice.
Nutmeg, which is a robo-adviser with about 60,000 customers and assets of £1.5bn, reported losses of £12.3m, while Scalable Capital, which has assets of more than €1bn (£0.89bn), reported a loss of £1.3m in their latest accounts.
Meanwhile, Moneyfarm has posted losses of £13.9m despite seeing its assets under management grow by more than 50 per cent to £400m.
Simon Miller, who works at robo-advice firm Scalable Capital, said: "I think the point being made around customer acquisition is an old one which has been documented several times. Particularly at a time when certain robos, including ourselves, are starting to reach the scale and growth rate which will take us past profitability.
"The point around uncertainty and interest rates is of course true but it is true for all firms trying to raise capital as we move into a tighter monetary cycle.
"That said we are well funded and are confident that our business model and our growth so far put us in a strong position. I would also add that we do not rely on a standalone direct to consumer business for our growth. We have a number of business to business to consumer partnerships which are live and contributing significantly to our growth alongside our direct to consumer business."
Scalable Capital has a partnership with ING in Germany which generated €500m (£445m) in AUM the first 8 months, he said.
Toby Triebel, chief executive for Europe at Wealthsimple, said: "Customer acquisition is one of the challenges of not being a 200 year old institution that commands trust because it's big and has been around for a long time, but where new players are standing out is by delivering more affordable and accessible services that are driven by an exceptional customer experience.
"Given the nature of the service we provide, we're focused on building long term trust with our clients which makes growth channels like referrals an incredibly important part of our business model."
A representative of robo advice firm Wealthify said: "The claim that our business model is unsustainable, typically comes fro traditional services that feel most challenged by new providers like us. The truth is that the way consumers are demanding services, including financial services is changing.
"89 per cent of the UK own a smartphone and almost three-quarters of users have at least one financial app on their phone. This demand for digital solutions will only continue to increase, particularly among the younger generations, who will want to manage their banking, saving and investments online via easy to use, smart, intuitive apps."
They added: "The assumption around acquisition is that it’s predominantly expensive above the line activity, when in reality there’s many ways in which we engage with and attract customers. Our app is top-rated in the app store, we engage extensively online, through content and influencers and through our partnership with Aviva – these are just some of the ways we can start a conversation."
david.thorpe@ft.com
