Robo-advisors will be forced to review their strategies as inflation bites

Robo-advice has become a buzzword – especially during the pandemic. However, compared to other investment avenues, growth in this space looks less impressive. Going forward, higher inflation amid slower economic growth will force robo providers to review their operating models. Heike van den Hoevel writes

As new investors flooded the market during lockdowns across the world, the robo-advice market impressed with strong growth.

Between Q1 2020 and the end of 2021, the global investor base expanded by 20% based on the average of reported figures. Yet not only has growth stalled since, it also pales in comparison to other investment avenues.

GlobalData’s Investor Insights: Channel Selection Analytics 2022 shows that global penetration of robo-advice increased by 4 percentage points (pp) between 2019 and 2022, now sitting at 13%. But this modest increase occurred at the same time as a wider and more dramatic turn towards digital investment channels.

Over the same period, global usage of digital channels such as mobile and online rose by 7pp. Even more impressive is the growth of ETFs, the main underlying asset used by robo-advisors. According to GlobalData’s Investor Insights: Investment Drivers Analytics 2022, ETF penetration increased by 12pp over 2019–22.

Clearly, low-cost options are the definite winner among retail investors, but robo-advice is not. While a beneficiary of the digital shift, these platforms lag behind other options such as pureplay online brokerages. As investors’ focus on value increases as inflation continues to bite, robo-advisors’ struggles to ensure profitability will only grow.

For connected robo-advisors – those attached to a bank or wealth manager – this might just mean accepting the service as a loss leader and shifting the focus towards cross-selling and up-selling efforts. For standalone robo-advisors it will be a balancing act of ensuring the right mix of fees, thresholds, and service levels. Notably, any pricing decisions should be made with caution, given the importance consumers place on cost in the provider selection process.