Low profit margins deter robo entrants

Low profit margins deter robo entrants

Low profit margins are deterring bigger players from joining the robo-advice market, the head of Brewin Dolphin's low cost advice service has said.

Speaking at the Robo Investing conference in London yesterday (September 11) James Richardson, head of WealthPilot at wealth manager Brewin Dolphin, said the bigger the player the easier they manage to stay afloat in the early years as they can divert money from other revenues.

However, even the larger players have begun adding human advisers to their service as a means to boost profitability, he said.

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He said: "I think the reason why some of the bigger players haven’t jumped straight into [this market] is profit margins are low in fully automated advice.

"The main profit element of these businesses I think is the adviser because [the advice] is more complex, because it's more bespoke. 

"I think as a lot of these bigger players start to move into this area [and the] larger the underlying assets under management they have to keep them afloat to pay for all the overheads, that's when they can really start kicking on and looking at other areas."

Bigger robo-advisers in the UK are now hiring in human advisers to "keep them ahead and keep them going", Mr Richardson said. 

He added: "It all sounds great, but a lot of people are trying to do it and a lot of people are eating a lot of money to do it - because it does take time to do and do it right."  

Mr Richardson predicted the likes of Google, Facebook and Amazon, who have all recently looked at launching robo-advisers, would have "more profitable things" to be pursuing in the next few years. 

The advice industry has not been an easy one for robo offerings to infiltrate.

In May Investec announced the closure of its Click and Invest robo-advice business after two years of losses, stating the reality of the industry was that appetite for its service had remained low and the market itself was "growing at a much slower rate than expected".

Nearing the end of last year robo-advisers Wealthsimple and Moneybox posted annual losses of £2.3m and £3.1m respectively and Nutmeg saw its losses increase to £12.3m for 2017 with Moneyfarm posting a loss of £13.9m for the same year. 

Xavier de Pauw, group head of strategic initiatives at Degroof Petercam, a Brussels-based financial services company, said entering the robo-advice market was not purely about technology but companies must also have execution and business plans in place alongside a "fair amount" of marketing budget to be "used wisely". 

He said: "I don’t think it’s just launching some technology which will allow you to compete.

"We’ve seen examples, JP Morgan, Investec, these are incumbents which have launched digital arms and within one or two years closed them. Didn’t sell them, just closed them.