HSBC just set out how hard it is for robo-advisers to break even and says a wave of consolidation is inevitable

Courtesy of BettermentBetterment CEO Jon Stein.
  • A recent HSBC report suggested that North American robo-advisers need to manage between $US11.3 billion and $US21.5 billion to break even.
  • Currently, only Betterment ($US14.1 billion) and Wealthfront ($US11.5 billion) have assets under management in that range, it said.
  • A key question the report raises is whether robos can attract wealthier customers as opposed to just millennials.

Most robo-advisers in the US are falling well short of the assets they need to manage to break even.

That’s according to a report by HSBC, published on Thursday, analysing the wealth-management ecosystem.

Assuming a fee level of 0.25%, a robo-adviser would need to manage between $US11.3 billion and $US21.5 billion to stay out of the red – and currently, the only robos managing that level of money are Betterment ($US14.1 billion) and Wealthfront ($US11.5 billion), the report said.

HSBC estimated revenue per employee at Betterment of $US154,000, based on the latest Securities and Exchange Commission Form ADV, the company’s platform fees, and the number of employees on LinkedIn. At Wealthfront, that estimated figure was $US151,000.

In comparison, staff costs per employee were $US157,000 at Charles Schwab last year and $US290,000 at BlackRock, the report said.

Of the other startups cited in the report, Personal Capital, which recently raised $US50 million and is gearing up for an initial public offering, fell closest to the range, with assets under management of $US8.5 billion. Other robos, such as Acorns, Stash and SigFig, managed under $US2 billion in assets.

In Europe, the break-even AUM fell to $US3.5 billion to $US5.3 billion, based on a higher fee level of 0.45%, the report said. Nutmeg, a leading European robo, had $US1.9 billion in assets.

The two main reasons that robos struggle to break even, according to the report, are low fees and a low average portfolio size. Under these circumstances, significant scale is required – but that’s difficult, as the marketing required to acquire customers is also pricey.

Robos burst onto the scene in recent years as younger investors looked for cheaper, more intuitive alternatives to what’s provided by traditional players in the space. The incumbents, including HSBC, have responded by developing robos of their own.

Worldwide robo advisor interestHSBCGoogle Trends results for ‘robo-advisor’ over the past four years.

And while the fintechs have gained market share among young investors, the report suggested the robos might struggle to attract a 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 said.

The report also said that for robos to grow and maintain their customer base, they’d need to evolve their offerings to meet client needs that might become more complex. Several robos, including Acorns, Betterment, and M1, have expanded on their initial platforms to include cash-management-type offerings.

But even if robos are able to adapt to their clients’ changing needs, there are likely to be mergers and acquisitions 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 report said. “The surviving fintech players could then look to IPO or be acquired by one of the other three players.”

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.