Robo-Advising: The Unforeseen Challenge

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Ivey FinTech: Perspectives

5 min readApr 7, 2018

Robo-advising continues to gain traction in personal finance industry, with $182B in Assets under Management (AUM) representing a 63% growth in the United States in 2017. In Canada, AUM reached $1.87B and grew an astounding 93% in 2017. In the rapidly growing Fintech industry, companies venturing into this emerging industry are racing for clients, and great consideration must be placed in which types of clients to target. Although many experts previously expected that robo-advising would open financial advisory services to a much younger demographic, the unfolding reality is more obscure in nature.

Why Robo-Advising and Young Investors Fit

The logic behind targeting millennials, or Generation Y, is sound; they are the most receptive demographic to robo-advising due to several factors. Firstly, robo-advisors offer lower management fees and smaller minimum investment amounts, which are enticing to this younger generation with less savings and an interest in growing their smaller accounts. Generation Y has been immersed in technology from a very young age and is therefore more likely to adapt a tech-oriented investment tool. In terms of management fees and minimum investment amounts as well as their unique appeal to younger investors, robo-advisors have the potential to effectively compete against traditional financial advisory services for the youngest investors. KPMG points out that companies already in traditional financial advisory services should target new and inexperienced investors to reduce market cannibalization, where newly introduced automated advising may negatively impact revenue generated from traditional advising services currently offered. Clearly, a lot of data and research points to millenials as a highly viable target market, so what has the industry found? Quite the opposite. Below are average client ages for some of the top robo-advisors in Canada by AUM:

The new findings of emerging Canadian robo-advising companies describe a higher-than-anticipated demographic of baby boomers and Generation X clients. The average age of clients amongst the 14 robo-advisors operating in Canada is 44 years old. This reflects a divergence of robo-advisor user demographics from predictions. It appears that part of the rapid growth in AUM has been spurred by older clients with larger retirement savings. At first glance; older clients with large portfolios provide greater returns to robo-advisors. In addition, many older clients have a smaller risk tolerance, approaching retirement, and would prefer lower management fees to save more for retirement. These factors have resulted in many robo-advising firms choosing to specialize in Generation X and baby boomer clientele, catering to experienced investors with extremely low management fees for large portfolio sizes. On the other end of the spectrum lies WealthSimple; despite having a strategy that targets younger demographics, their typical investor is still slightly older than the millennial demographic. WealthSimple has also found that catering to young investors in their twenties is challenging in part due to rising college debt, forcing millennials to focus on paying tuition loans before investing their cash.

So why target millennials at all?

Securing millennials must remain a priority in this growing industry as they represent clients with a high lifetime value if long-term relationships can be created. Robo-advising has promise in managing funds for investors of diverse ages with varying objectives, showing that it can adapt to changing portfolio sizes and objectives as millennials progress through life. Capturing millennials becomes essential as they will inherit and earn trillions of dollars over the next two decades in an intergenerational wealth transfer between the largest demographic age groups. Although robo-advising firms have developed algorithms and select portfolio options that cater to specific investors, it remains to be seen how these firms will be able to adapt to the changing investor with age, reflecting different priorities at different stages of life. This flexibility and understanding of priorities is currently better grasped by human advisors, who develop personal relationships with their clients to create very personalized investment plans. This dynamic and personal relationship remains an obstacle to overcome in robo-advising services. With the exception of Wealthsimple, very few robo-advising companies have a focus on Gen-Y and millennials. Although this may align well with short-term objectives, the distant future could prove otherwise.

Understanding the Millennial Investor

To acquire millennial investors, robo-advising companies need to have a strong understanding of this demographic. Peer-to-peer student loan company LendEDU.com has researched and produced results that show that American millennials are surprisingly distrusting of robo-advisors, with many participants stating that they still prefer traditional advisors. Surveyed millennials also believe that traditional human advisors outperform robo-advisors in aspects such as perceived cost efficiency and ease of entry, in addition to being less likely to make mistakes and losing money. In addition, a large proportion of millennials who don’t use robo-advisors have not heard of them. This shows that robo-advising has yet to penetrate the millennial market sufficiently and the majority of potential clients haven’t been informed. More factual marketing techniques, financial literacy education and the ability to interact with a human advisor will help robo-advisors cater to inexperienced Gen-Y investors. A transparent and friendly interface and insight into the processes that go into deciding what to buy and sell will also improve understanding of the robo-advisors.

Key Takeaways

An opportunity for revenue growth lies in the Gen-Y and millennial demographic. A combination of artificial intelligence and a human touch may also improve the appeal of robo-advising services to these young investors who are new to portfolio management. As baby boomers gradually pass on their assets to their children, another major demographic in terms of size, in time there will be a large younger demographic seeking investment options. Targeting this age group will generate sustainable growth for both robo-advising companies and traditional banks expanding into the FinTech space. With robo-advisors improving the accessibility of financial services to previously untapped large demographics, innovation in marketing and acquisition of younger clients will give companies an edge.