DanH wrote: ↑31 May 2019 15:44
Moreover, a contact of mine maintains that the cost of robo-advice will trend toward zero. It's hard to imagine but he claims that a smart person or two (maybe even
someone we all know ) could create a user interface with a questionnaire that maps to one of a handful of model portfolios - and give it away for free.
A roboadvisor like that shouldn't take too much resources to put together. If it was developed by someone with professional clout (check), supported by a DIY community (check) that is surrounded by DIY bloggers/influencers (check), it could certainly take off. Make it open source, and connect it (or add functionality related) to personal accounting software, and you have a winner.
The problem I anticipate (and you'd know much better) is regulatory. Roboadvisor have not stood the legal/regulatory test yet. Institutions using them have likely front-loaded their projects with regulatory and legal costs, and still wouldn't know whether they'd win. Calling these robot advisors probably won't help future court cases.
The reason for high costs, is that they are cannibilizing products. The better a broker designs it, the less revenue and profit they generate. With adequate adoption, a roboadvisor could certainly lower its (internal) cost below 1bps. How does one grow and make profits though, especially when it rivals and cannibalizes MF trailer fees and stock trading commissions. You have to either:
1. Find a revenue-model that works: account management fees, 3rd party "trailers" from ETF selection, securities lending, profile marketing, ancillary services, etc.
Or
2. Have an independent ETF company put it together (Vanguard, Horizon, etc.) for their own benefit.
Or
3. Have it done by someone with truly altruistic motives (and we're back to the open source model ... I can help anyone with such motives, but I wouldn't know how. My development skills are way too old. I've been out of the industry, online security, SaaS and cloud services for almost 3 years niow, which starts to look like light years.
If this could be linked to a discount broker for seamless execution; he could be right. But I think that's where his reasoning breaks down.
Discount brokers were already working on such technology when it was ruled "advice" (a problem for discount brokers that rely on exemptions from the suitability obligation). And that scared them. So it's not clear that they'd be allowed to 'plug in' a third party application/UI. All to say, robos as we know them are likely to stay. But WS' 50 bps is likely to come under pressure.
I doubt that you'll ever see that, unless it is a proprietary roboadvisor supported by the broker itself (Blackrock/RBC, BMO, etc.) or a powerful partnership (Vanguard/Questrade, but that's a lot to bet for a behemoth like Vanguard on a regional project that they don't need.
As adoption increases, you'll witness a descent into lower margins, but the platforms are currently priced to account for low adoption, low competition and a desire to cannibalize other revenues as little as possible.