While there have been a number of small robo-advisor start-ups in since the financial crisis, and a few traditional financial services firms have thrown their hats into the ring, the looming question of the robo-advisor space is whether, someday, a "mega" web business like Google would want to someday get in on the action. Which, given the sheer scope of the company, could cause some real disruption of financial advisors.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the recent announcement that Google has decided to shut down its Google Compare service, which provided consumers an opportunity to compare and then purchase a wide range of financial services products, from CDs and savings accounts to mortgages and car insurance. Some had speculated that it was only a matter of time before Google used the service - which was once actually named Google Advisor - as the launch platform for their own robo-advisor service.
Ultimately, Google declared that its decision to shut down Google Compare was driven by the simple fact that while people might be gathering information online to evaluate financial services products, they weren't necessarily buying online. In other words, at the end of the day, it takes more than just a website to buy a complex financial services product. A challenge that Google learned from its Google Compare experiment, and that the direct-to-consumer robo-advisor platforms and their slowing growth rates are revealing as well.
Of course, none of this is meant to say that technology isn't important and won't change the way that financial advisors do business. But just as online brokerage platforms of the 1990s and the rise of the internet didn't replace financial advisors, it appears less and less likely that robo-advisors will, either. Still, just as the leading advisory firms ultimately adopted the internet technology of the 1990s to run successful advisory firms today, the cycle is playing out again with Blackrock buying FutureAdvisor and Invesco buying Jemstep. Which means in the end once again it won't be the technology firms that replace advisors, but the technology-augmented advisors who beat out the rest that lag behind!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
The Rise And Fall Of Google Advisor
Welcome everyone to Office Hours with Michael Kitces!
So our topic today is Google, and this ongoing discussion that's been out there for the better part of a year or two now about whether Google is some day going to come into financial services and go into direct competition with all of us as financial advisors.
In fact, there was about two or three weeks ago an article that generated a ton of buzz... an analyst report from Citigroup, where one of Citigroup analysts said, "I have this audacious idea. Google should buy AIG, the big mega financial services company, and use it as an innovation lab so Google can reform financial services." Of course he acknowledged it was a long shot!
But this discussion has been coming a long time of whether Google, with the mass that is has, would some day just come storming through financial services and just start cleaning up products, since people buy stuff online and they're the biggest search engine. In theory, they should be able to drive a whole lot of business.
Now, the truth is Google actually had a service for this. It launched almost five years ago. It was actually originally called Google Advisor. You can look it up. It came out in 2011. They morphed it after a few years into what they called Google Compare. And the idea of it was... it was going to be a financial services product comparison site. So you can line up all the different CDs out there and pick the best CD. Or line up the savings accounts and pick the best saving account. You could do it with credit cards. You could do it with car insurance. You could do with mortgages. They were experimenting with travel insurance.
All these different financial services products that people go online to search for information about in order to buy, and Google said, "Well, we're just going to aggregate all the information together because we're the great ultimate aggregator, and we're just going to drive the business and get it sold." It was basically a lead generation service, as is virtually everything that Google ultimately does. But the idea of it was product providers would buy in to be listed in Google Compare, so that they could get their services sold in the same way that many advisors participate in advisory lead generation services. It was intended to be the same thing, and there was a lot of discussion, "Well, it's only a matter of time before Google not only has Google Compare for credit cards, auto insurance and mortgages, but for your portfolio, or launching their own robo-advisor, or carving up amongst robo-advisors. Here's the best robo-advisor for you depending on your circumstances."
So all this buzz about whether Google was going to just storm through financial services with its own robo-advisor. And then the news hit last week, after five years of iterating on Google Advisor and Google Compare, they are shutting the whole thing down. It's being completely scrapped. I'll keep a link to this in the show notes, but they're shutting it down entirely. It got announced last week. It's going to stick around for about one more month, so you can search right now on Google Compare and still find stuff. It's going to officially terminate March, 23rd, and that's it.
The End Of Google Compare -- Searching Is Not Purchasing
As Google tactfully put it... this was from their announcement:"Despite people turning to Google for financial services information, the Google Compare service itself hasn't driven the success we hoped."
Basically, the buzz seems to be that Google failed on this for a couple of reasons. Number one, they couldn't get much momentum in the advertising because it wasn't converting. As Google notes, people search for their information online. That doesn't mean they're ready to buy their financial services products online without a little bit more information, without a little bit more due diligence.
So there's this key distinction: just because I searched for information online doesn't mean I'm instantly ready to make the purchase at that moment. I may need the information in order to do the purchase later, but that doesn't mean I'm ready to make the purchase itself online, on the spot.
Financial Services is a Highly Regulated Industry
In addition, Google actually acknowledged, regulation was a significant challenge. Obviously, as many of us know living in the industry, we're a highly regulated industry. Tech companies have trouble coming into the financial services space because there's so much regulation to go through.
The discussion apparently was Google originally was hoping that by now they would have been up and running in a couple of a dozen states, and in reality they were still under 10 because they were just trying to get through the regulations. And even in those 10, just because people were searching for information online, didn't mean they were actually buying anything. And so Google basically said, "We're throwing in the towel entirely on Google Compare, shutting it down, and we're just going to sell AdWords for other companies that want to list their own services."
So I think this is really notable in the landscape of all this discussion of #FinTech, and #InsurTech (which is the insurance industry's version of FinTech), of technology companies coming in, that a company with the sheer size and mass of Google and the unimaginable amount of traffic in usage that exists in Google... that they still couldn't actually get it done.
And I think it really comes down to a few things. First, there's probably a little bit of this phenomenon that's called the stack fallacy, which is just because Google is really good at the bottom layer of this stack, which is bringing in all their search traffic and getting people to use it for information, doesn't necessarily mean it's going to be good at selling a product on top of this. And there are all sorts of examples of this out there. Salesforce is built on an Oracle database but Oracle can't make a good CRM system. It's hard to go up the line just because you have the bottom layer.
Insurance Products are Sold - Not Bought
But I think it even goes beyond that. It's the challenge for insurance products in particular. Anybody in the business knows insurance is something that is not bought; it is sold. People have to be convinced to buy insurance. No one really, really wakes up and is like, "Jeez, it's been nagging at my soul that I just don't own enough insurance and don't pay enough in insurance premiums. I've really got to go online and get me some of that." That's not really how it happens. Sure, every now and then we have a scare event and someone buys insurance but, by and large, we have to be sold insurance. We have to be convinced that we need it. So once we're convinced we need it, we might go online and search for information, but that still doesn't necessarily mean we make the buying decision, we execute the transaction online.
Being in a Low Trust Industry Puts Greater Emphasis on Brand
And I think the additional complication to it, especially when you get the financial services products, the sad reality, we are in really low trust industry. I think technically we're still beating Congress on the trust scale, but we're right down there near car salesmen when you look at some of the surveys out there. We are not a trusted space. And frankly, I think our industry has brought it on ourselves, not necessarily us advisors that are on this call, but a lot of sales people in financial services have done a lot of bad things for a long time.
But what that means is trust... Trust becomes so massively essential for getting business done, and the challenge of trying to sell products online is that it's really hard to build that trust factor. It's really hard to build a brand and to get people comfortable. And this is what all of the robo-advisors have discovered in their own suffering in trying to grow their businesses, that it's not enough to just say, "Hey, we charge 25 bps and the industry charges 1%." They've gotten only 0.01% market share with that story, trivially, irrelevantly small. Seriously, it's 0.01. They're almost up to 0.02% with rounding. People don't buy financial services on price alone. They buy it on value, and they buy it on trust. And since it's hard to evaluate value and trust, often they buy it on brand. Perception of brand becomes what they trust.
Robo-Advisor Woes And The Challenge Of Building A Brand
And that's why I think you're seeing a lot of the dynamics that are currently happening in the robo-advisor space, where so many companies started out as direct-to-consumer and are now walking away from that and either shutting down entirely, or shifting to work with traditional financial services firms because it's so hard to get that consumer trust. To put it another way, the client acquisition cost to get a client is brutally difficult, as an advisor or a robo-advisor. At least we charge 1% and can afford to spend a little time and money on marketing. Robo-advisors at a low price point have very little budget to spend on marketing, and that's basically what's been burning them.
So we saw Jemstep throw in the towel and get purchased by Invesco. They originally were a direct-to-consumer service. They'd already pivoted to be B2B, now they got bought up by a large player. BlackRock bought out FutureAdvisor for the same challenge. FutureAdvisor was the third major robo-advisor out of the big three, and falling further and further behind. So not a good sign for the whole space when the number three player can't even survive in direct-to-consumer. So BlackRock bought them. Now, BlackRock is offering FutureAdvisor to other companies. So we saw BBVA Compass and a few others get announced in the past few weeks. Now I think you're going to see that puts more pressure even on the other B2B robo-advisor players. Companies like Trizic and Vanare. It was probably actually pressure for Jemstep as well that large firms now are saying, "Well, if we're going decide which B2B robo-advisor to buy, why would you buy one of these tiny startups when you can go with FutureAdvisor, via BlackRock?"
In fact, there was an old saying, when all the computer companies were getting going 30 to 40 years ago, startup computer companies had a huge challenge. IBM dominated the marketplace. And the reason was that anybody who was responsible for a purchasing decision, would always be afraid that if you went with a new company, if you bought some new company's computers in the 70s and 80s and they turned out to be bad, you would get fired. If you bought an IBM, and it turned out to have problems, well, "nobody got fired for buying IBM". They were the market-dominant player.
And I think you're seeing the same effect play out now in the B2B robo-advisor space. No one is going to get fired for going with BlackRock and FutureAdvisor. And so every other robo-advisor even going to B2B now has a huge amount of additional pressure on them to justify why anybody should buy them versus FutureAdvisor. And my prediction is within a couple of months, you're going to see several more B2B robo-advisor players either fold entirely or get bought up by another large firm as we just slowly consolidate the number of players because there's just not actually that much opportunity.
Robo-Advisor Growth Is Slowing At Wealthfront And Betterment
And we've only looked at direct to consumer side. Growth rates on robo-advisors have been slowing dramatically. Wealthfront was at $2.6 billion last August. It's six months later, they still haven't announced crossing the $3 billion mark. They used to grow at 10% a month, which means they should have been through it by October. Instead they haven't gotten, well that would be 15% growth in six months now.
Betterment is still growing a little bit faster, but their growth is linear. They added about $1 billion over the past six months. They added about $1 billion over the prior six months. Since the denominator is getting bigger, they're a larger firm, that means their growth rates are crashing downwards. Growing a billion from $1.5B was better than growing just a billion on $2.5B where they were over the past six months. And the growth rates just keep trailing down as well.
In the meantime, you're looking at the true winners that are coming forth in the space, which really makes the point that it's all about trust. The winners in the space so far are Schwab and Vanguard. And the reason why they're winning really is well, sort of three-fold. Number one, the truth is most of the business that they're getting, what we're hearing from all the analyst calls and the buzz, is they're converting existing clients. They're not actually pulling in people off the street into robo-advisors to the tune of billions of dollars. They're taking existing clients, and converting them into basically managed accounts, or managed accounts with the wealth management relationship in the case of Vanguard.
Now, that's good business for them. Vanguard sells ETFs that cost 5 basis points and wealth management that costs 30 basis points. So they make way more money when they convert their existing people into that service. Schwab is the same way. I'm sure most of the people that are converting are transactional folks who are paying 10 bucks a trade and are now in Schwab's robo-advisor that's predominantly filled with Schwab ETFs for the 70-plus basis point expense ratio on many of the funds. So they're way more profitable getting their clients simply to convert from old business into their managed accounts, but really they're just converting managed accounts for existing clients.
Hybrid Advisors Continue To Dominate
The second driving factor is both those companies have significant human interaction. Vanguard, although people call it a robo-advisor, it's not. There are almost 400 CFP certificants now delivering personal financial planning. They are like most of us that are on this call, not a robo-advisor, or at least they're much closer to us than a robo-advisor. Now granted, you may not get the super in depth kind of financial planning work that some of us might provide to our clients, but Vanguard is providing a baseline human interaction, personal financial planning relationship that I think is actually going to be a new benchmark that all of us have to beat to justify our fees. But the key point is, it's not actually a robo. It's human interaction. It's human advisor relationship.
And Schwab really is the same thing. While they labeled it as a robo-advisor and they marketed it that way, Schwab has, whatever it is, I think close to 200 retail branches and thousands of financial consultants in all of those branches. That's who's ultimately doing business with consumers. So they might be selling it like a robo-advisor, but really it's financial consultants recommending managed accounts. Not new, not new for the industry. Many of us on this call have been doing this for a long time.
But the real driver I think that's dictating the winners and losers here, it's brand. It's brand and it's the trust that's gets built by brand. There's a reason why FutureAdvisor is working well for BlackRock, because no one gets fired for owning BlackRock, because BlackRock is BlackRock. Vanguard functions the same way. No great surprise that they're having the most success building up robo-advisor assets, or really their hybrid advisor assets, because they're already the country's largest asset manager with an unbelievably good brand. And Schwab is the same way.
Great Companies With Great Brands Leverage Technology
So really I think all you're seeing play out is this dynamic that companies with great brands are leveraging technology to build business. That's really what all these comes down to. Companies with great brands leveraging technology to build business. And this is not new. This is an opportunity for us, right? Any of us can build great businesses for our clients, use technology and bring it in, but it's this key distinction. The technology is not disrupting us really. It's not actually replacing us at all.
And it reminds me so much... if you wind back to like the 1990s. All of the discussion then was that financial advisors will be rendered irrelevant by online websites where you can buy stocks and mutual funds. I know some of you who are listening may be too young to remember that. Those of you who were around the business, maybe you can tap your [Periscope] screen if you recall this. All the discussion in the 1990s, even very early in the 2000s. "Financial advisors will soon be irrelevant because investors can buy their stock online with E-Trade or Schwab.com or all the rest." That was the discussion.
And now what, we look back 20 years later and see what actually happened. We're still around, E-Trade actually still exists for a small segment of self-directed consumers, but they took almost no business from advisors. And ironically who are the largest players serving advisors? Schwab. The company that was supposed to disrupt advisors with online brokerage became the primary online brokerage provider for advisors. Who are the other major players for advisors? Fidelity, TD Ameritrade. Who else has large retail consumer presence with online brokerage? Fidelity, TD Ameritrade.
It's not a coincidence that ultimately the companies that had great technology didn't just use it for serving consumers directly, they used it to leverage advisors and the advisors who used that technology have built the best businesses over the past 20 years. Technology ultimately lifts us up. If you keep doing the way things were done, you're going to be in trouble. But if you move forward and use the technology, you just come out with a bigger, stronger, better business. That was the lesson of the Internet revolution in the 1990s, and that's the lesson we're seeing play out with the robo-advisor movement now. Existing great companies use tech to serve their clients better. They don't get replaced by technology alone.
The Slow Death Of The Robo-Advisor Movement
So frankly, I think we're ultimately witnessing the slow death of the robo-advisor movement. I had written last year that I thought you were going to see the beginning of the end. Robo-advisor growth rates would slow, and you would see companies start adopting their own robo-advisor solutions and give them away for free to consumers and charged for their other value, which is exactly what happened. And now in 2016, I think you're going to start seeing some companies actually fold. Not necessarily the big players, they're so big and hey have so much venture capital, they're going to stick around for a while. It's going to start with the smaller ones.
But I think Google Compare shutting down, the old Google Advisor service shutting down, is a very negative harbinger for the robo-advisor space overall. When the fundamental challenge for these companies is how to acquire clients and Google, the world's largest search engine that parses people into where they're going to go can't make this work, it is not a good sign for the space overall. Doesn't mean technology is going away. It means we as human advisors continue to have the business, and technology is not the threat that replaces us. It's what augments us and makes us better.
So I hope that's helpful for just some food for thought around the landscape, the big Google Compare news. I hope you keep hanging out with me on these Periscopes. Tuesdays 1 p.m. East Coast time for Office Hours with Michael Kitces. So I hope this has been helpful for everyone. Have a good day!
So what do you think? Is Google's decision to shut down Google Compare a negative sign for the robo-advisor industry? How do you see technology impacting your advisory firm in the coming years?
110% Transparency says
I’m concerned that Ruth Porat–the queen of customer penetration–now is CFO at Google.
There is so much hear to think about. I’m not buying it all. I’m not sure the death of robos can be proclaimed when they never lived to begin with, not without massive VC life support. Also, sponsored content and lead-gen were DOA. But it is allowing me to come to some much better informed opinions. Great work pulling this information into a workable pile, Michael.
Michael Kitces says
A fair point that it’s valid to question whether robo-advisors were ever really “alive” and viable in the first place. I’ve been one of many to pound the table all along that they were buried by their client acquisition costs.
Still, when a CLIENT ACQUISITION ENGINE like Google throws in the towel as well, that’s especially discouraging (not withstanding that it may be a stack fallacy issue more than an acquisition issue per se).
But with the pace of shutdowns accelerating, and the growth rates of the original players falling, it seems we’re reaching a (negative) tipping point?
I see it the same way I see the stock market. When it’s rising, people’s mood tilts too readily to euphoria. When the going gets bumpy, euphoria does not pass go or collect $200. It goes straight to despair and negative tipping points.
I imagine good news is still possible!
Michael Kitces says
Yes but to be fair, I was bearish during the rising market phase, too. 🙂
John Lefferts says
Well done here Michael and I totally agree, particularly in the insure tech space. I believe P&C insurance may get some B2C traction, but Life, Annuity LTC and DI need an advisor/agent interface. And I remember the predicted demise of the broker/advisor back in the 90’s…didn’t happen, but did change the way we deliver advice. Same going on here.