Future of Investing
‘People are niches’: Robo-advisers are narrowing their focus to grow market share
- Robo-advisers are launching specialized product offerings to grow their customer base
- Incumbents that launch robo offerings are raising the bar for startups, as differentiating on price alone is no longer a winning formula
As the field of robo-advisers gets more competitive, going niche is becoming the way to differentiate. Some companies pursue specific demographics, like halal investing platform Wahed, or Ellevest, that focuses on women. Others are launching specialized products. In the last year alone, for example, Betterment and Acorns rolled out sustainable investment options, Aspiration cut the minimum amount for its sustainable fund to $100, and Wealthsimple launched a halal portfolio. As robo-advisers grew after the 2008 financial crisis, discussion centered around how incumbents would react. But as the number of robo startups operating in the space grows, and as large legacy firms develop their own robos, the question now is whether a niche strategy will ensure that the startups can survive amidst what many see as the inevitable consolidation of the marketplace. Herbert Moore, co-founder of robo-adviser WiseBanyan, said specialization is a strategy to grow the platform's reach. "Once you have a core technological infrastructure, it can lend itself to a lot of different variations, and you can target different demographics," said Moore. "Additional products and services are in the works as to how we can access different parts of the client base -- whether it's married couples, people who want a socially responsible portfolio, or people who believe in automation and want to allocate more towards tech investments." Moore said that while he believes some consolidation will happen, there's room for different players. To him, the biggest factor influencing consolidation of the market is when too many companies are offering services that are considered additive, rather than differentiated from one another. A crowded market At 200, the U.S. market boasts the largest number of direct-to-consumer robo-advisers, according to research firm Burnmark. Industry watchers say the challenge for startups is to generate sufficient scale at lower price points, particularly since many of them operate a lower-margin business compared to incumbent firms. "The whole robo-adviser business is difficult because there's no money in it," said John Siciliano, managing director of asset management advisory and strategy lead at PwC. "The opportunity in the robo space is going to become a very limited one for people who don't have scale across products, who don't have capital, and who don't have sophisticated technology -- because it's only so far that a lot these robos are going to be able to take you before they're going to find that they don't have enough of one of those capital products or next-step technologies." In other words, those that are primed for success are the companies that have scale -- factors that give legacy firms an inbuilt advantage, especially when they have launched their own digital advisory services. For example, last week, Morgan Stanley joined the ranks of incumbent firms like Charles Schwab, Vanguard, Wells Fargo and others that have launched their own robo products over the last couple of years. Morgan Stanley is also appealing to a target market of millennials interested in socially or environmentally conscious investments. So while the smaller players need to differentiate to grow their customer base, it's an approach that also has risks. "If you deviate too far from a core product offering and aren't delighting all your customers, your growth will slow too -- you have to be careful not to go too far down the niche path," said Davis Janowski, senior analyst at Forrester Research. Incumbents develop robos for specialized demographics Among U.S. legacy firms getting into robo-advisory offerings is John Hancock. The company developed three robo products for specialized customer groups, including a product for retirement planning launched earlier this year; Twine, for committed partners who want to save and invest, also launched this year; and COIN, a robo-adviser focusing on values-based investments that it intends to launch next year. For John Hancock, niches are a way to gain the trust of the customer, and are a basis to recommend other products and services depending on the customer's needs. "People are ultimately niches," said Steven Dorval, head of innovation and digital advice at John Hancock Financial Services. "It's a combination of customer retention and broadening the relationship -- with the relationship you're building within the app, you can expand to other things where it would feel natural and not contrived." Twine's interface is slick and accessible -- laid out in a way customers will perceive it as an innovative product, and not one from a stodgy legacy institution. Twine app screenshot "It's about building a product that looks and feels like a startup, but has the John Hancock name behind it," said Dorval. "And it's like you don't have to worry about whether this company will be around in a few years." Looking to new markets to grow Wahed Invest, a halal robo-advisory platform that launched in the U.S. in May, is thinking bigger than just the U.S. as the path for potential growth. "If you think about halal investing in the U.S., it's a niche offering, but when you put it in a global perspective, it becomes the total opposite -- that is our plan," said Kareem Tabaa, chief growth officer for Wahed. Tabaa said he's not concerned about incumbents developing competing offerings, in part because the fintech ecosystem is still in an early phase in many of his target markets. In addition, he said banks have approached Wahed for opportunities to partner -- an option he doesn't rule out. "If it makes business and financial sense, we are more than happy to do that; there's always room for growth when you find that partnership between a startup and a bank." To be an effective differentiator as a startup, undercutting incumbents on price only won't be enough, said Alois Pirker, research director at Aite Group. Instead, robos will need to understand niche areas of the market and meet the needs specific to them. "You have to specialize, because the generalists are the 'Merrills and Fidelitys' of the world," he said. "Figuring out a niche and proving that you have something that the niche responds to makes it more attractive -- take Ellevest, for example, being able to sell to female investors really well -- many big firms struggle with that."