First-mover advantage is no guarantee of long-term success. Take Myspace. Once the world’s largest social networking site, it was eclipsed in user numbers by Facebook in 2008, just three years after being acquired by NewsCorp for almost $600m. In 2011 it was reportedly sold for just $35m.
Could similar dynamics, on a smaller scale, be working in the nascent robo-advice market? The likes of Nutmeg and Money on Toast have generated plenty of noise around automated advice models and low-cost passive portfolios.
Post-RDR, it is not hard to understand the interest: for those investors who cannot, or will not, pay fees to a financial adviser, a simple automated model offers a low-cost way to gain access to professionally managed portfolios.
But innovation does not necessarily deliver market dominance and I wonder if there are parallels here with the trailblazing internet banks of the late 1990s which, despite forging the template for online banking services, have long been overshadowed by the established players.
Smile, the UK’s first full-service internet bank, looks set to finally slide from view after its parent Co-operative Bank recently signalled a change in customer acquisition strategy, while the various divisions of Egg, another internet banking pioneer, have been acquired by major lenders including Barclays and Yorkshire Building Society.
Most banks now allow customers to open and manage accounts online, of course, and I do not think it is unreasonable to assume that the big beasts of financial services will, in a similar vein, ultimately decide to enter the robo-advice market themselves.
Some, of course, already have: LV=, for instance, recently took a majority stake in a robo-adviser, Wealth Wizard, whose technology powers the mutual’s online advice service. With technology development expensive, time-consuming and fraught with risks, it is unlikely to be the last deal like this we see in the coming months and years.
How much of a threat do robo-advisers pose to the established D2C businesses? This, in my view, will be contingent on the nature and rapidity of their responses. Perhaps some will seek to tilt the playing field in their favour by competing on service rather than price. Some may attempt to challenge the upstarts head-on.
Either way, it is difficult to envisage the biggest players sitting on their hands while new entrants gain market share. (Not that market share is easy to win: the biggest players in the platform market, for instance, have lost little or no ground to the new propositions that have emerged in recent years.)
The reality is that the leading D2C businesses, including the vertically integrated megaliths, are already developing or adding to their propositions in this area. They have the means and the will to capture a large slice of this market.
I have little doubt that standalone robo-advice firms will have their day in the sun. But it is hard not to wonder if they are blazing a trail for the benefit of others.
Martin Davis is chief executive of Kames Capital.