Asked on 06 May 2020
The most common revenue model for robo advisors is to charge a management fee on the the assets invested with them. Most charge somewhere between 0.2 to over 1% (Kristal.AI has zero fees for the first $50K invested)!
That said, to operate profitably, it would probably take AUM of a few multiples $100M, depending on the robo advisor's structure and other factors
I truly think a minimum of $100m AUM. If most of that is charged at 0.6% p.a, that puts a yearly revenue of $600k. Possible to cover wages, business expenses, marketing costs, and break even or turn a tiny profit.
But possibly closer to quarter of a billion is more likely a safer number to make proper money.
08 May 2020
Hi, below is an insightful article from International Banker. https://internationalbanker.com/brokerage/why-robo-advisors-are-struggling-to-break-even/
I have previously worked for an robo-advisor. Based on my experience, robo-advisor is not a profitable business. The main difficulty for robo-advisor to achieve profit is the revenue generated from customers would not be enough to cover the cost of acquiring and retaining them. Say, for example, if your sales team managed to convince a customers to invest 1,000,000 USD into your robo-advisor, and you charge him/her 0.4% per annum. Your revenue from that customer will be 4,000 USD per year, which could be lower than your sales team member one month salary, and that is excluding the cost of communicating and retaining him/her. And the situation could be very similar if you are using digital marketing.
So, if that is the case, why don’t robo-advisors charge people more than 0.4%, maybe charge 1% instead? That is not an unreasonable charge, right? But the fact is, robo-advisor business is highly-competitive because the threshold to enter the business is very low. The competition has driven the average charge rate to be lower and lower, and now the robo-advisor companies cannot charge high enough for them to make profit! Also, robo-advisor usually only advise on investment on ETF, so don’t expect there is astonishing return for customers. Yes, you may get a good return, but it could just be few more percentage higher than the overall market. But their portfolio return will also crash when the market crash! And when market crash, prepare for 10% to 20% of your hard-earned customers leaving you. Up till now, I didn’t find a robo-advisor which has successful return when market fails.
All in all, robo-advisor is a good idea (AI investing, very cool idea!). But the competition has already making the business unprofitable. I think eventually, only few robo-advisor will be able to survive.
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