HSBC just set out how hard it is for roboadvisors to break-even, and says a wave of consolidation is inevitable
- A recent HSBC report suggests North American robo advisors need to manage between $11.3 billion and $21.5 billion to break even.
- Currently only Betterment ($14.1 billion) and Wealthfront ($11.5 billion) have AUMs in that range.
- A key question the report raises is whether robos can attract wealthier customers as opposed to just millennials.
The majority of robo advisors in the US are falling well short of the amount of assets they need to manage to break even.
That's according to a recent report by HSBC on Thursday that analyzed the wealth management ecosystem.
Assuming a fee level of .25%, a robo advisor needs to manage between $11.3 billion and $21.5 billion in order to stay out of the red. Currently, the only robos managing that level of money are Betterment ($14.1 billion) and Wealthfront ($11.5 billion), the report said.
HSBC estimates that revenue per employee at Betterment is $154,000, based on the latest SEC Form ADV, the company's platform fees, and the number of employees on LinkedIn. At Wealthfront, this number is $151,000.
In comparison, staff costs per employee at Charles Schwab in 2018 were $157,000, with this number hitting $290,000 at BlackRock.
Of the other startups cited in the report, Personal Capital, which recently raised $50 million and is gearing up for an IPO, falls closest to the range with an AUM of $8.5 billion. However, other robos such as Acorns, Stash and SigFig all manage under $2 billion in assets.
In Europe, the breakeven AUM falls to $3.5 billion to $5.3 billion, based on a higher fee level of 0.45%. Nutmeg, a leading European robo, has $1.9 billion in assets.
The two main reasons robos struggle to break even, according to the report, is due to low fees and a low average portfolio size. Under these circumstances, significant scale is required. That also proves difficult as the marketing costs required to acquire customers are also pricey.
Robos burst onto the scene in recent years as younger investors looked for cheaper, more intuitive alternatives than what was provided by traditional players in the space. The incumbents eventually responded - including HSBC - developing robos of their own.
And while the fintechs have done a good job gaining market share among young investors, the report suggests the robos might struggle to attract higher-end clientele.
"It is uncertain whether many players can emerge as credible managers for the lower end of mass affluent rather than just a low cost advisor for millennials," the report states.
The report also states for robos to grow and maintain their customer base they'll need to evolve their offerings to meet client needs that might become more complex. Several robos, including Acorns, Betterment and M1, have expanded upon their initial platforms to include cash-management type offerings.
But even if robos are able to adapt to their clients' changing needs, M&A will likely occur in the space.
"This is a crowded market and so it is likely that the players able to gain critical scale will act as consolidators. The surviving fintech players could then look to IPO or be acquired by one of the other three players," the report states.