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Robo-advice margins set to plummet

By Tim Stewart
2 minute read

The entrance of vertically integrated players into the automated advice space could wreck direct-to-retail robo-advice business models, warns Apex Capital Partners.

Speaking to InvestorDaily, Apex Capital Partners principal Ilan Israelstam said a number of ETF issuers in the United States have begun to offer online advice, with Vanguard the most noticeable example.

The total market for robo-advice in the US to date is approximately US$5 billion in funds under management – with major fintech names like Wealthfront and Betterment taking the lion's share.

"Vanguard’s version of that had $17 billion in FUM [as at 31 March 2015]," Mr Israelstam said.

The enormous take-up "in a few months" is a cautionary tale for the direct-to-retail robo-advice model, he said.

"The advice side of [robo-advice] is going to be commoditised down to close to zero, which will mean that it’s going to favour models that are vertically integrated," he said.

Pointing to another example in the US, Mr Israelstam said Charles Schwab's robo-advice service costs investors nothing.

"There’s no price on the advice side of the value chain. Of course they make money with the ETFs, because they’ve got their own ETFs.

"I would be surprised if it evolved any differently here in Australia," Mr Israelstam said.

Mr Israelstam is also the head of strategy and marketing at Australian ETF provider BetaShares – a company that he says is very interested in the robo-advice space.

"We’ve seen a lot of entrepreneurs get into [robo-advice in Australia]. We think it’s going to be hard to find one that we think has nailed it," he said.

It may well be the case that robo-advice can't be sufficiently "nailed" without some kind of vertical integration.

"And one has to be very cautious in that space with the response of the big four and AMP because when thinking about investing in this area, you have to be cautious of where are you hitting the incumbents," he said.

Mr Israelstam acknowledged ANZ's recent joint venture with ETF Securities (ANZ ETFs) as an example of a potential vertically integrated model.

"[The big four banks] are very clever and have very substantial amount of resources behind them. So if you are targeting a space that is core to what they do – and let’s be honest, advice is one of the most critical things – you need to be a bit more conscious of their response," he said.