4. Their business model has yet to prove it can stand the test of time.
Many in the industry question whether robo-advisors can last on their own because they just don’t make enough money.
“Betterment, Wealthfront, LearnVest, Personal Capital … there are about two dozen of these organizations, and none of them are going to survive in their current iteration,” Ric Edelman, chief executive officer of Edelman Financial Services, said in a recent interview. “They’re not earning enough revenue to sustain themselves.”
Up to now, Edelman said that these service providers have only been able to sustain themselves through venture capital and private equity funding.
“They’re blowing through tens of millions of dollars in capital,” he said. “It’s very reminiscent of the dot-come ’90s.”
BAM Advisors’ Goldberg suggested that a lot of these companies are at risk of ending up with an 80/20 model where 80 percent of their revenues come from 20 percent of their clients. The problem with that is that in a bear market, investors tend to get out, and as these dollars flow out, robo-advisors would struggle to meet their financial obligations.
Some say the robo-advisory business may have to be less robo, more human to survive.
“I’m not suggesting that the business is a bad business,” Edelman added. “Their technology is very impressive. What they’re discovering is that it takes more than an algorithm to build an effective advisory business.
“Users do want human interaction; they do want advice beyond merely the investment management piece,” noted Edelman. “And most of them are discovering this.”