Why I see a bright future in “Robo+Advisor” (and not in the pure-play Robo-Advisor)
Interview with Spiros Margaris by Kevin Moseri.
Last week, I had an insightful interview about the future of robo-advisors with Spiros Margaris (@SpirosMargaris), head of the advisory boutique Margaris Advisory (MargarisAdvisory.com) and Senior Advisor to FinTech Forum. Additionally, he is a Senior Advisor at kapilendo, a uniquely positioned German crowdlending platform, and at moneymeets, the leading German “FinTech Supermarket” company.
Spiros is ranked number 27 worldwide by Onalytica.com (Top-100 FinTech Influencers and Brands, Sept. 2015) and number 16 in the world among FinTech influencers/experts by Traackr.com (Sept. 2015). He has been chosen as an author of @TheFINTECHBook (2016, Wiley), which will explore the future of FinTech. He also participates in the Fred Alger Management creative program called “Think Further.” In this program, Alger connects some of the best thinkers in the world to discuss disruptive technologies that will impact a multitude of fields in the next 5 to 10 years.
[Kevin] For those who might not really know, what are robo-advisors?
[Spiros] The robo-advisor is a part of the disruptive FinTech revolution. The pure robo-advisor – without any human advisor attached to it – provides people with a professional automated algorithm-based investment advice service.
The robo-advisor service is less costly than traditional advice, [currently] attracts primarily less affluent individuals, and provides next to 24/7 access also simplicity and transparency most of us are now used to or implicit demand. So it seems perfect for many Millennials who get a lot of advice from friends, family, and social media, and I believe [it seems perfect] for all of us, to a certain extent.
But many studies also show that Millennials [currently or eventually want] a human voice or human interaction at some point in the advisory process. Besides, as their wealth grows, they will need more complex advice that will [require] a professional advisor who can mix “Robo+Advice” as needed and requested.
I always like to tell my institutional clients the example of the travel agency and how it relates to robo-advice and Millennials. When I book a straight flight and/or hotel, I usually use a cheap online provider like Ebookers or Expedia. However, when I like to book a more complex trip, I like to use my travel agency. That’s why there will always be a place for robo-advisors and robo+advisor because people will come to the point where life and needs become more complicated.
[Kevin] How big is the industry at the moment?
[Spiros] We should exclude the big established incumbents like Vanguard, Schwab and Fidelity and [still] look at the, I would call them, startups: for instance, Betterment, Wealthfront, and FutureAdvisor, [recently acquired by Blackrock]. Then, I think we could say that the startups manage a relatively small amount of about $21 plus billion (AUM) and the number is growing daily very fast.
[Kevin] Who are some of the big players offering robo-advisors?
[Spiros] Some of the biggest names now are Charles Schwab, Vanguard, Fidelity Investments, Betterment, Wealthfront, Motif, Hedgeable, Personal Capital, Nutmeg, Aspiration, SigFig, and Covestor. But there are many more robo-advice startups that I did not mention here but I am certain will keep changing the way the game is played and, more importantly, how the game will be played out.
[Kevin] What is the market potential for robo-advisors?
[Spiros] The sum of assets the startups manage now is not huge, but almost no one believes that robo-advisors will in some form not control a big part of the professional investment management industry, and that [may happen] rather sooner than later.
[Kevin] With the prominence of robo-advisors, why should people get excited about them?
[Spiros] Robo-advisors provide investors and advisors more options, and that’s great. The investor gets professional automated investment advice that is less expensive, has lower entry hurdles, and a beautiful, simple interaction. The advisor gets a tool that allows him to hold on to clients that [currently] make no business sense for him to hold on to but eventually might have the assets to support such a close relation and make it a very profitable one.
[Kevin] Can a startup robo-advisor business model survive against the incumbents like Vanguard, Schwab, or the large banks?
[Spiros] That’s a good question that I would like to answer like this: If the startups keep innovating and constantly adding cool and attractive features, they will have a fighting chance to become incumbents themselves one day. They need to understand that they will never be able to be cheaper than a Vanguard or Schwab, so that’s not a fight that they should try to win.
Profitability is clearly a serious issue for robo-advisors since they need to increase their assets under management to compete against the Vanguards of this world. That’s why the robo-advisor startups must remind themselves constantly what attracted and will attract clients to them in the first place. And, of course, they should find new ways to stay attractive as a destination for value.
Furthermore, I also believe strongly in the future of a partnership that results in robo+advice or a robo+advisor, where everyone can play to their strengths and therefore create a win-win situation.
[Kevin] How can market volatility affect robo-advisors?
[Spiros] We don’t know yet how robo-advisors will perform in volatile markets like those in 1997, 2001, or 2008 since they all have started after 2008. But one thing is sure: market corrections will test not only robo-advisors, but also the traditional advisor. Both constantly need, and I must add that many already do, educated and calm investors when things seem to go out-of-control in financial markets.
[Kevin] Are there safeguards against such market volatility?
[Spiros] As I said before, it’s all about constantly educating clients and trying to explain the market situation of a correction or crash as it happens. That can be, and is done, through social media, SMS, email, and if available, through human telephone calls.
[Kevin] Blackrock recently announced that they will be focusing on selling FutureAdvisor’s services to banks, insurers, and other advisory firms so they can offer robo-advisory programs. What do you think of such a white-label approach?
[Spiros] Blackrock acquisition of FutureAdvisor is great news for the whole industry since it sheds more light on the robo-advice industry. If Blackrock believes in robo-advice, I guess we should and can as well. To answer you specific question, I think it supports my predictions why I see a bright future in robo+advisor and not in the pure robo-advisor play.
[Kevin] Getting back to Margaris Advisory, what are some of the trends that seem to excite your clients?
[Spiros] Since my clients are FinTechs as well as financial institutions, there is not one definite answer to what excites them. To put in a simple way, I would say that the FinTech entrepreneurs and companies are excited by the enormous potential they see to disrupt the financial industry. Furthermore, the attention and increasing acceptance of their business model they receive is exciting.
To bring up specific examples, I can talk about the two FinTech companies I advise and where I am also a shareholder.
For instance, moneymeets is excited by the increasing public awareness and acceptance of their FinTech Supermarket (FinTech 2.0) approach. It can serve many clients’ needs that are already today implied by various FinTech solutions. The benefits of the FinTech Supermarket comes through the collaborations of partnerships between FinTechs and banks or FinTechs and FinTechs.
The other example is the uniquely positioned FinTech company kapilendo. I believe it is one of the most promising German FinTech crowdlending companies. It offers an online marketplace where small and medium enterprises look for financing by private investors. Kapilendo management is not afraid of crowdlending competition like Lending Club, OnDeck or Prosper. They are excited about any entry in the crowdlending market. It sees them as team players in the bigger picture, as partners to help raise the peer-to-peer lending awareness and possibilities among people.
The financial institutions, on the other hand, are or should be scared of what FinTechs, robo-advisors or crowdlending for instance, do to their traditional business models. Talking with many executives, I do sense that financial institutions see the huge opportunity – payments, blockchain, robo-advisors, crowdlending, etc. – that the disruptive innovation by FinTechs brings.
And even if many banks still do not see the FinTech opportunity or act on it, it does kind of magically force them to change their existing business models in a way that prepares them for a future.
[Kevin] Once again, thanks, Spiros, for such a comprehensive and insightful outlook on robo-advisors. We would love to know what you think of Robo-Advisors and the outlook and vision presented by Spiros.