If you build it, will they come?
One of the key tenets used in favour of launching early robo-advisors is summed up well in a line from an iconic movie: “if you build it, they will come”. Well, if you judge success by assets under management then this isn’t necessarily true, just yet anyway.
Betterment, Wealthfront, Nutmeg, Personal Capital, FutureAdvisor, Scalable Capital, Learnvest and many others are still a few years off from being profitable in their own rights. Charles Schwab and Vanguard may possibly be profitable – but it’s not clear whether or not the business is cannibalising some of its existing client base, and their respective Robo-Advisors are still tiny relative to their existing assets. I don’t have any statistics on South African Robo-Advisors, though I would be surprised if the answers were very different.
The truth, in South Africa and many other developed nations, is that a large segment of the working population doesn’t save, and the reasons are not simple and not quick to fix. However, there is an opportunity to create a new awareness of the power of saving and investing and direct to consumer Robo-Advisors are well placed to support this – they just need to be able to stick it out.
In building the business case for OUTvest we uncovered some of the complexity involved in savings in South Africa, we have outlined these briefly below.
- South African’s don’t save, and it’s not just South Africans.
South African debt and savings as a percentage of household income
Source: South African Reserve Bank (KBP6287J, KBP6525J)
Personal savings in South Africa as a percentage of household income have been declining over the last 50 years, and it seems as if South Africans have been substituting savings for debt. I would wager that there is a similar story in other economies with a highly developed banking system.
- There is an ‘advice gap’ and it is fairly large
I believe that there isn’t enough advice to go around in South Africa. There are numerous limitations to the face-to-face advice model especially when it comes to the number of clients an advisor can adequately service using traditional methods.
To be clear, at OUTvest we are fervent supporters of financial advisors (we even have advisors in our contact centre), but we don’t think a face-to-face advice model can effectively service everyone in South Africa seeking financial advice.
We estimate that there are close to two million individuals in South Africa who would benefit from financial advice. It’s a very rough calculation and includes a significant proportion of individuals who are credit impaired and cannot and should not save or invest before repaying debt.
If there was enough advice to go around, would household debt in South Africa really be as high as it is currently? I don’t think so.
- There are emotional reasons why people don’t save and invest
In developing OUTvest we also uncovered some insights that swayed individuals from even thinking about investing in the first place:
- Identity: “Investing is for the elite, not for me”
- Consumption: “I have no money left over for investing”
- Loss aversion: “I cannot afford to lose money”
- Fear: “It is too hard to understand, I feel intimidated”
These are not necessarily rational, yet are incredibly important and overcoming these emotional barriers takes time and consistent messaging from an entire industry and not a single firm.
What is the business case for building a Robo-Advisor?
The business case for building a direct to consumer Robo-Advisor is already extremely difficult given the scale required by the marginal revenue on offer, especially in light of the cost of acquiring a client. Estimates of the cost of client acquisition are in the region of R3000 to R8000 per client based on international figures.
The only solution proffered at this at the moment is either to have a large base of contributed capital and patient investors or an existing financial services brand to leverage and patient management.
Encouragingly, many companies in South Africa have built or are busy building Robo-Advisors. The robo-advice industry is alive and growing fast and this is a great outcome – changing the mindset of saving in South Africa will take a combined effort.
The definition of digital advice and the business models exploring Robo-Advice are rapidly advancing. Many providers are digitising financial advisors and creating new Robo-Advisor business models in mortgages, life insurance and many other areas. We believe this trend is only the beginning, and will simply accelerate.
The Financial Services Board (FSB) is also moving quickly in providing strong guidance on building digital advice systems that are robust and focused on good outcomes for consumers. The draft provisions contained in the Determination of Fit and Proper Requirements for Financial Services Providers, which deal specifically with regulating digital advice in South Africa, are a great start and based on international guidance.
One of the reasons I think that the world and South Africa are building Robo-Advisors at such a rapid rate is that there is a lot one can learn about building digital businesses and preparing for the next level of digital advancement. One of our developers once said to me, “building a Robo-Advisor is unlike building a rocket, only once you launch a Robo-Advisor do you start learning and evolving the service.”
We believe there is a growing consensus and mounting evidence that financial services is evolving into fully digital offerings in much the same way as other consumer-facing industries have already done. Robo-Advisors offering investment services will be but one of the vast array of future digital advice services helping consumers make better financial decisions.
Robo-advisors are being built and they are coming and so will clients, eventually!
Since 2005 `Grant Locke has been passionate about digitising investment advice. Prior to being offered the role of a lifetime with OUTsurance to build OUTvest, Grant spent 9 years at Schroder’s in London working in their pension fund consulting, private wealth management and the multi-asset divisions.