Have robo-advisors – one of the hottest financial trends of the decade – finally jumped the shark?

That’s the provocative claim of a recent white paper studying the industry by M&A consulting firm Silver Lane Advisory, which compares these providers of low-cost automated online investment advice to the experience of Internet-only banks in the 1990s. Standalone Internet banking was the flavor of the day until the big banks woke up to potential for online banking to boost their ability to reach and serve their existing customer base, at which point they leveraged their own brand power and infrastructure to wipe the newcomers from the map. The rest was history.

But will that history be repeated?

Certainly, something is starting to shift, if only subtly, within the competitive landscape of the robo-advisors.

Wall Street Robo-Advisors

Personal Capital Advisors Corp. recently hired investment bankers to advise on the possible sale of the company.  Up until now, Personal Capital had frequently been mentioned in the same breath as better-known companies like Wealthfront and Betterment, as one of a select number of personal financial advisory firms delivering their models online and backed by venture investors, as having the potential to become “unicorns”, with a market capitalization of $1 billion or greater. Until word leaked out that Personal Capital was at least considering an alternative strategy, there had been no indication that any of these market leaders was abandoning the idea of ultimately pursing an initial public offering, and ending up doing battle directly with establishment rivals like Schwab and Vanguard.

As we discussed earlier, Wall Street incumbents aren’t just sitting by calmly and watching the startups waltz off with their wealth management clients.  They are launching their own variants of low-fee, high-tech robo-advisor services, and with their size and market clout, doing a far better job at pulling in assets than any of the startups can. For context, Charles Schwab’s Schwab Advisor Service attracted $5.9 billion in assets in its first nine months in business; Personal Capital, founded in 2009, is one of the top independent robo-advisors, with $1.5 billion in assets under management. Vanguard now has some $20 billion in assets in its Personal Advisor Services, launched in 2013.

Being late to the game doesn’t change the fact that Schwab, Vanguard, Fidelity, BlackRock and others now viewing the robo-advisors as prey have some hefty competitive advantages. Consider marketing, on which Schwab spends $300 million annually, and on which it contemplates “a significant ramp-up in spending” going forward. That baseline amount is only slightly less than the $500 million value that Personal Capital’s owners are rumored to have placed on the entire company, and vastly in excess of what the company could afford to devote to drawing attention to its services among potential clients. (And that is without even mentioning the fact that Schwab has a built-in advantage in terms of brand-name recognition.)

And that kind of marketing has made business more costly for the startup robo-advisors, which are great at appealing to customers once the latter are aware of their business model. On the surface, latter seems to have almost been custom-designed to appeal to a generation left suspicious to the point of paranoia about the financial world by the financial crisis of 2008 and its aftermath. What’s not to like about a simpler, low-fee approach to managing money, one that liberates you from the clutches of big Wall Street institutions and that (big win!) typically features low minimum investments and that relies heavily on cool smartphone apps.

Robo-Advisors: The Real Cost

But then there’s the pesky matter of what being part of the establishment means in cold financial terms. By some calculations, the cost of acquiring a single U.S. customer can now be as high as $2,000. Most of those customers simply aren’t generating enough revenue to be worth acquiring. Down the road, the picture could get bleaker, Silver Lane Advisory’s report cautions. In addition to the high marketing expenditures, they’ll have to recruit more real advisors to boost service levels, and hang on to those customers. The firm argues that the break-even point, in terms of revenues, could be 40 times larger than for a traditional firm, given the lack of scale.

The financial crunch already seems to be driving some robo-advisors into the arms of suitors. A case in point: last year’s purchase of six-year-old LearnVest by Northwestern Mutual for an eye-popping $250 million. LearnVest’s clients don’t pay a dime to access its basic financial planning resources, and only a fraction of its users ended up paying the $299 required to consult a real advisor to give them basic, personalized guidance on their budget and on investing. For Northwestern Mutual, the deal was a win, however, since it gave the old-style insurer a toehold of sorts into the world of consumer-oriented financial advice, rather than financial plans that are built around products (like the annuities that Northwestern sells to its clients).

Now it is Personal Capital that is in the spotlight, and triggering speculation that if it is publicly placing itself up for sale, others may be soliciting offers more quietly. While contemplating a sale, the company also is interesting in discussing a fresh infusion of capital. And it also has cut the minimum amount of assets a new client must have to open an account, to a mere $25,000 from $100,000. That dramatically transforms the very nature of the business, from one that catered to the mass affluent – say, millennials trying to become ultra wealthy – to ordinary people who simply have large savings accounts that they want to put to work a little more actively. The latter aren’t ideal clients for most prospective acquirers, and the industry gossip viewed the dramatic cut in account size as a sign that Personal Capital is anxious to boost its assets and account numbers any way it can. That, they say, doesn’t augur well.

Competing with Robo-Advisors

The wild card here is how the big players – the Schwabs, Vanguards and BlackRocks – choose to compete with robo-advisors. If the robo-advisor model itself has been disruptive, by offering clients an alternative low-fee, high-tech option, the fallout from what looks increasing like a wave of consolidation could be even more so for the entire investment industry. A player like Schwab or Vanguard could easily decide to simply compete with Betterment or Wealthfront on fees, making it tough for a client to resist the offer of a similar kind of platform at a still cheaper cost. The worst case scenario would be that they could succeed in making it uneconomic for venture capital backers to keep pouring money into the sector.

Personal Capital may end up being the canary in the coal mine. Will it find investors willing to provide additional funding? Will it find a buyer – and if so, at what kind of valuation? Or will the struggle faced by robo-advisors just start getting slightly tougher with every day that passes, with every additional billion dollars in assets that flows to their establishment rivals?

The bottom line is that even if the individual businesses don’t survive in their current form, like all technological transformations, their legacies will endure. Asset management firms that ignore the reasons that attracted customers to robo-advisors – fee transparency and low fees, first and foremost – will simply end up re-learning those lessons, more painfully and expensively, in some other way as a new raft of innovators arise to challenge them in years to come. Because jumping the shark is never the end of the story.

Suzanne McGee

Suzanne McGee has been reporting on trends in the business and financial world since the 1980s, when the first barbarians (KKR) were at the gates of RJR Nabisco. After spending 14 years at the Wall Street Journal in Canada, the United States and Europe, she became a freelance contributor to myriad publications on both sides of the Atlantic, specializing in decoding the sometimes complex jargon with which the denizens of Wall Street and the City surround themselves. She is the author of "Chasing Goldman Sachs", a book about the origins of the 2008 financial crisis.

Latest posts by Suzanne McGee (see all)