Robo-advisers struggling to turn a profit

Due to low fees and the difficulty associated with gaining clients, robo-advice firms are finding it difficult to generate a profit, says QuietGrowth.

Robo-advisers struggling to turn a profit

tlewis

Last Updated: 04 March 2016 Published: 04 March 2016

Dilip Sankarreddy, founder of automated investment platform QuietGrowth, said "no one is making any money" out of robo-advice.

Speaking to Adviser Innovation, he pointed out that in order to generate $500,000 in revenue, a robo needs to have approximately $100 million in assets under management (AUM).

Moreover, Mr Sankarreddy explained that in order to grow a robo's client base, constant investment needs to be made to enhance the tool.

"You need to build an even better product, and you need to spend money to get the word out," he said.

"You have to reinvest more to make the product good. We are speaking of millions of dollars here."

Mr Sankarreddy noted that high costs and small gains are the reality of robo-advice start-ups. This is not negative, "but a realistic perspective of what it takes to get there", he said.

He said his firm is "in it for the long-run" and is confident that with time and further investment, it will begin to generate profits.

According to Mr Sankarreddy, servicing existing clients is an additional expense.

"Even though we say that we are in the automated industry, people do call or email you. We have to engage with them and that costs money," he said.

Trust, he added, also needs to be established and maintained with clients. If the tool does not function seamlessly, trust is unattainable. This, again, requires constant investment.

Mr Sankarreddy pointed out that in order to grow a robo-advice firm's client base and the tool itself, external sources of capital must be found.

For the "kinds of goals" his firm has, he said venture capital will need to be considered.