Robo-advisors have been the latest hot trend to take over the financial landscape. From Wealthfront, to Betterment, SigFig and more, there’s no shortage of companies to work with who can manage your money.
The robo-advisor trend has positioned itself as an affordable alternative to pricey financial advisors. The result is essentially a democratization of services and increased access to financial management and advice.
Many robo-advisor companies are targeting the younger generation — a generation that grew up in the digital age and may have less assets than financial advisors typically work with. On the outside, it seems like a brilliant idea and a smart move.
Jemstep’s New Pro Advisor Model
But the trend is still so new, and in just a short time we’ve seen companies make drastic changes in their offerings. Take Jemstep, for example. Previously, Jemstep was simply a mutual fund and ETF comparison tool who focused on retirement account planning and guidance. But in such a short time, they’ve changed up their model yet again. They have completely turned away from the robo-advisor model and joining the competition.
They have revamped their services to cater to financial advisors, instead of focusing on everyday consumers. So, why the shift? It appears that the previous pricing model wasn’t sustainable and Jempstep saw that they could flounder working against advisors, or join them and offer a service to supplement what they’re already doing.
According to their website,
“Jemstep is transforming the way investment advisors run their businesses by providing the best of robo-technology for client engagement, onboarding and service delivery.”
This particular business pivot seems to allude to something larger at stake for robo-advisors. Robo-advisors are still the new kids on the block and there isn’t comprehensive data to share their long-term success. But given this change in direction for Jemstep, you have to wonder, are robo-advisors a sustainable model?
Will robo-advisors make it in the long-term? Will they be a longstanding company that will be a name brand in twenty years?
Will Robo-Advisors Survive?
For some of these answers we turn to an expert in this space. Alan Moore, the founder of XY Planning Network, an organization of fee only financial planners for Gen X and Gen Y, explains.
“I believe that robo-advisors are here to stay, although not necessarily in the current companies or current structures. The issue for many of the current robo-advisors is they took took outside funding very early on. Taking funding can change the culture in a company, because the return expectations of the investors are very high.”
“Based on current funding, the robo-advisors currently on the market must grow exponentially over the next several years in order to meet the demands of their funders. See this recent article for some context“, explains Moore.
“Another issue that is the elephant in the room for robo-advisors is client retention when the market drops. Most robo’s were started when the market was at an all-time low, so they’ve experienced record returns for 5+ years. Their revenue is based on assets, so when the market drops 25%, their revenue will also drop by 25%”, says Moore. “The real question is will they keep their clients? No one knows the answer yet, but a bear market will likely separate the pack in terms of long-term viability.”
“To stay competitive, most robo’s are moving into the advisor space. While some robo’s have average account balances in the $10-$50k range, advisors have account balances of 10x that, meaning they control significantly more assets,” explains Moore. “By assisting advisors, they are able to tap into a huge market of potential assets. In addition, it puts an advisor between the client and their money for when the market drops. It basically allows the robo’s to have a bunch of advisors hand-holding their clients through poor markets, without actually having to hire them!”
When we asked Moore if he believed if robo-advisors will make it, here’s what he said. “I do believe robo-advisors are here to stay, however they will have to adapt over time. They will also have to learn how to set realistic growth expectations, as over-eager investors might be the downfall of their systems,” he says.
So, robo-advisors may be here to stay, but perhaps not in their current form. As time goes on, I’m sure we’ll see similar changes in other companies in the robo-advisor industry.
Currently, the robo-advisor industry is a new market that’s overly saturated and vying for consumer’s attention. In order to stay relevant, robo-advisors will need to adapt and continually reinvent themselves to stay current with consumer demand.
It will be interesting to see how Jemstep continues to change and if others follow suit. We’ll be sure to keep you up-to-date on all the current changes ahead.
What do you think — will robo-advisors make it?