The study, conducted by the firm’s equity research team, said the low fees of digital platforms – known as ‘robo-advisers’ – mean the organisations will need to merge with other firms or invest in large scale advertising operations in order to be profitable.
It also said, however, that it would take a decade to recover the advertising costs. “We see the economics of stand-alone robo-advisers as challenging, and believe that few will be materially profitable and still standing several years down the road,” the report reads.
“The current legion of stand-alone robo-advisors will have to invest heavily in advertising, or consolidate to gain scale, be acquired or partner with established brokerages, or go out of business.”
It estimated that the ‘break-even’ level for firms is between $16bn and $40bn assets under management, which is up to 20 times the current level. But even when this level is reached, the research firm said it could still take years before any of the accounts become profitable.
“Little to fear”
Morningstar said discount brokerages have “little to fear” about losing their highly profitable DIY-trading clients, and suggested firms should offer value-added services which robo-advisers are unable to offer.
This includes giving them access to insurance products, hedge funds and holistic financial planning.
Despite the dismal outlook for robo-advisers, the report said the growth potential for robo firms is large because tech-savvy millennials or lower net worth individuals fit into a market which is underserved by wealth management firms. It therefore said the $16bn to $40bn break-even point can be addressed because there is enough money in the market to go around.
“While the break-even point looks small compared with the overall addressable market, the robo-advisors have penetrated only a sliver of that market despite being in business for years.”
