Cost-Income Ratios
and Robo-Advisory
Why Wealth Managers Need to Engage with Robo-Advisors

Robo-Advisors and their impact on
Wealth Managers
In this third edition of Deloitte’s series on
Robo-Advisory in Wealth Management, we
at Deloitte would like to look in more detailat the impact of Robo-Advisors’ cost structures on the Wealth Management segment
and to examine the options WealthManagers have to make use of recent
developments in the market to achieve
cost benefits. Improving the cost-income
ratio (CIR) and at the same time rejuvenating the product offering is the Holy Grailthat all financial institutions are looking for.
Robo-Advisory firms demonstrate that it ispossible to build a bridge between offering

innovative and good services while taking
a low-cost approach. This is how investments starting as low as 1,000 EUR can be
managed successfully while charging lessthan 1 % in management fees.
In general terms, Robo-Advisors are
increasingly being looked at by traditional
advisors, established Wealth Managers
and banks owing to the rapid growth of
more than 9 % p.a. in Assets under Management (AuM) in Europe over the past
few years.1 This growth also means that
there are many players with a comparable
1

Source: EFAMA Asset Management Report 2015.

service offering on the market, making the
Robo-Advisory market a crowded space.
Thus, it is essential for Robo-Advisors
to find their unique selling proposition(USP) in order to set themselves apartfrom the mass. In the near future it canbe expected that one key player with thepotential to disrupt the Wealth Management industry will emerge, rather like Uberin the passenger transportation industry
or Airbnb in the hotel industry. Today,
Robo-Advisors are already providing anarray of alternative solutions that werepreviously almost exclusively the businessof traditional Wealth Managers such as
UBS or Morgan Stanley. That means that

Cost-Income Ratios and Robo-Advisory

Robo-Advisors such as Vaamo or Nutmeg
are capable of profiling their clients’risk appetite and can offer diversified
investment portfolios that match this risk
appetite in a fully automated manner. They
are highly advanced, comprehensive, easy
to use, and yet secure – a circumstancethat may change the industry landscapein the long term and render existingproducts and traditional investment management processes obsolete much sooner
than might be expected.
Furthermore, all this is offered at considerably lower prices – since Robo-Advisors have lower expenses, they still cangenerate attractive margins at fairly low
prices. This is an additional challenge thattraditional industry players should plan toovercome if they want to play a significant
role in the foreseeable future. The very
low price level of Robo-Advisors is one of
the main selling points, complemented
among other things by considerable
transparency, comparability, availability,
and an automated investment taxonomy
free from investment decisions biased byemotion.
This abstract therefore essentially covers
the massive impact of Robo-Advisors on
cost-effectiveness which is also reflectedin the enormous cost pressure whichbanks and Wealth Managers are struggling with. This epitomizes the generally
miserable situation in which the majorityof players in the sector are currently
operating, with cost-income ratios thathave skyrocketed to beyond the 90 %level – and irritatingly enough, the trend
is expected to continue. In broad terms,
costs are being pushed up by exceptional regulatory measures and the complexity and costs associated therewith,
under which the entire industry is atpresent suffering.
In addition, we conducted a comprehensive comparison, demonstrating that bymeans of a successful integration or partnership-based collaboration, Robo-Advisors can play a decisive role in identifying

2and exploiting cost optimization opportunities. We then present three options for
reducing costs by means of the integrationof (scalable) Robo-Advisory solutions. The
first two possibilities to profit from thecost advantages are to cooperate with anestablished player or to build and incorporate a Robo-Advisor into the existingproduct offering. The third option is toleverage a platform, which is defined asbuying or building a Robo-Advisor but at
the same time opening up the Robo-Advisory platform to other market participants
such as other Wealth Managers or family
offices.
The abstract concludes with an outlook on
the future of Robo-Advisory and the traditional Wealth Management industry. Whatcan be expected from Wealth Managers?
Most of them are aware of the progressive
expansion of Robo-Advisors, but so far
only a few players have engaged actively
in this field. Nonetheless it is becoming
obvious that there is also increased competition among Robo-Advisors with aparticular focus on Wealth Management.
Many risk and venture capital companies
are investing in various Robo-Advisors,which is why more and more Robo-Advisors are entering the market to jump on
the bandwagon. This in turn increases
the probability that one Robo-Advisor
will emerge which will one day be able toacquire a Wealth Manager.
Whatever strategy is finally selected,
advisors seeking to hold or expand theirstake in the highly competitive WealthManagement sector must quickly take theinitiative by cooperating with, building, orleveraging a Robo-Advisory platform.
Ultimately, traditional Wealth Managers
will only survive and find their way backon track by fully accepting and recognizing
the increased importance of Robo-Advisory and making use of the incredible
variety of opportunities that exist forcooperation to complement each other’s
strengths for an increased benefit toclients.

Robo-advisors’ pricing models
Robo-Advisors are financial services
providers with comparatively extremely
low prices. Deloitte’s database of morethan 100 providers related to Robo-Advisory services highlights the fact that mostproviders charge an annual management
fee which normally ranges between 0.02 %and 1.0 % of the AuM. Traditional WealthManagers, according to their own pricelists, charge about 2.0 % to 3.0 % in fees
and are not able to compete with theseprices for this kind of service provided,thus more and more customers are
deciding to shift larger portions of theirinvestable assets to Robo-Advisory investment schemes.2
To understand why Robo-Advisors areable to offer services for a fraction of thefees of traditional Wealth Managers, it isnecessary to understand the underlying
costs of both of them.
Although the services offered by WealthManagers are more comprehensive
compared to pure Robo-Advisory focusing
on investment management, the aim ofalmost all offered services is the same –the investment of funds to realize a returnfor a pre-defined risk appetite. However,the costs resulting from the investment
process differ tremendously. Therefore
the following analysis and its results focus
on the costs for the investment of client
assets.
Analyzing the Wealth Management departments of leading international and specialized financial institutions shows clearly
that the highest cost factors for traditional
Wealth Management are salaries andthe connected costs of social security,
pensions and other personnel-related
costs. In the group of Wealth Managers
analyzed, the associated costs averaged
around 60 % of total costs. Overheads anddepreciation and amortization complete a
cost structure that can often be described
as unhealthy.

2Source: World Wealth Report 2015.

Cost-Income Ratios and Robo-Advisory

Applying this key measurement to asample of Wealth Managers, Deloitte
calculated that each client advisor ought
to oversee AuM of €100 million in orderto generate as much revenue as the costs
the client advisor creates (see Figure 1).
Every additional euro of AuM creates acontribution margin to finance service
employees, research departments,
licenses, facilities, and other expenses. In
the sample, each client advisor is responsible for €250 million of AuM. Therefore,€150 million of AuM generate a contribution margin to finance these cost factors
and in the best case to create a profit.
However, German Wealth Managers are
faced with high cost-income ratios, ranging
up to 0.90, which indicates that the AuM a
Wealth Manager is responsible for are still
too low to generate sufficient revenue.

Fig. 1 – Required Assets under Management to cover costs
per advisor

100

100.8
-52%

EUR Million

80
60

48.8

40
20
0
Wealth Manager

Robo-Advisor

To cover salary costs

To cover overhead costs

Source: Deloitte Consulting GmbHHigh costs for personnel are not reallysurprising since Wealth Management – asdefined by traditional Wealth Managers –is a client relationship business. Clients
must be served, representative buildings
in highly expensive cities are used forregular meetings or events. Special client
reports are necessary to satisfy clientdemands. Such an environment is not only
very expensive, the way in which clientadvisors interact with their clients is also
very time-consuming. For this reason,each client advisor is responsible for alimited number of clients.

This limitation increases the numberof advisors required and subsequently
increases costs. Although the clientadvisor ratio is usually not disclosed,
recent Deloitte research indicates that one
client advisor is responsible for 60–150
clients, which shows the upper limit. The
small number of clients served and theresulting large number of client advisors
increases the amount of AuM eachclient advisor must be responsible for tofinance salary and overhead costs. To beable to compare Wealth Managers with
Robo-Advisory firms, Deloitte introduced
a key measurement – the required AuM
to finance the average costs of one clientadvisor:34

Although most Wealth Managers who offer
tailor-made solutions do not disclose theirpricing, three different types of fees canbe distinguished: event-based fees, assetbased fees, and all-in fees.
Event-based fees include transaction fees,
management fees, and custody fees. Assetbased fees consist of performance andadvisory fees, while an all-in fee is rather
exceptional, most Wealth Managers charge
a mix of event-based and asset-based fees.
Event- and asset-based fees vary between
1.25 % and 1.5 %. However, large discounts
are the rule rather than the exception,
especially for major positions of High Net
Worth Individuals (HNWIs) who have agreater bargaining power.

α = Average salary of a client advisor3
β = Average overhead costs of a client advisor4

x = (α + β ) * π

π = Average operating income of a client advisor = Average AuM of a client advisor
x = Average AuM required to ﬁnance salary andoverhead costs of a client advisor

Average salary is the sum of salary, social
security costs, bonuses and other direct salaryexpenses.
4
Average overhead is the sum of costs associatedwith facilities used, licenses, and other expenses.
33Cost-Income Ratios and Robo-Advisory

Although traditional Wealth Managers
manage the majority of the wealth,Robo-Advisors are catching up very quickly.
Especially US-based Robo-Advisors areshowing significant AuM inflows. Betterment
and Wealthfront, for example, each haveapproximately US$5 billion in AuM. This is
not a lot compared to the leading WealthManager UBS with approximately US$2,000
billion AuM in 2014, but still a significant
value for companies which have been
existent for less than 10 years.
Compared with the fees of traditional
Wealth Managers, Robo-Advisors claim
to commoditize Wealth Management
services and make them accessible
to mass or affluent clients, by offering
automated investment advice, which ismuch cheaper than traditional advisory
services. What all Robo-Advisors have incommon is their low pricing, even thoughpricing structures sometimes vary intheir detailed configurations. However, in
Deloitte’s analysis of the Robo-Advisorylandscape, which was described in theprevious edition “Same name, different
game – a look at the German Robo-Advisor landscape”, the results show thatmost fee types are very similar to classic
portfolio management firms. This meansthat over 80 % of the Robo-Advisorscharge a management fee on the AuM ata fairly reduced level compared to WealthManagers. As a variation from the classic
pricing model some Robo-Advisors chargea performance fee either in addition toa management fee, for example Ginmon,
or a performance fee only, in the case of
Cashboard and United Signals. Another possibility is an annual flat fee to access theonline investment management platform.
Despite the fee structure, Robo-Advisors
attract new customers by innovativeclient interaction tools. Frontend design,
customer services, and analytics as well as
user experience and user interaction are
far ahead of the classic Wealth Management industry. Finally, there are scatteredpricing structures in the market in combination with innovative and up-to-date
design strategies, but it can be expected

4that in future only the most promisingpricing strategies will survive.
To answer the question of why Robo-Advisors are able to build an economically
viable business while charging much lower
fees on AuM for their services, one has
to take a closer look at the cost-structureof Robo-Advisors compared to existing
Wealth Managers.
Robo-Advisors have second-to-none
cost advantages over traditional WealthManagers, thanks to their digitalized
online investment approach, whichbecomes particularly evident in threeareas of business: personnel, operating
expenses, and cost savings through digitalization.
Personnel
First of all, Robo-Advisors do not needas much staff as Wealth Managers to run
their business. As the advisory process
is automated, there is no classic advisor
role to be fulfilled. There are accountor portfolio managers who oversee theinvestment process. For communication
purposes they use digitalized channels
such as live chats in order to support
Robo-Advisory clients in their investment
process. As a rule, most employees of a
Robo-Advisor do not require an investment advisor license to provide classic
advisory services, which saves costs
given the high degree of digitalizationand intelligent algorithms employed.
For the most part portfolio managers
provide only technical support rather thangiving investment advice. The automation of investment processes allows one
account manager to serve up to 20,000
clients, whereas service staff employedby Wealth Managers usually assist one tothree advisors who manage 60–150 client
portfolios. Newly-founded Robo-Advisors
often start with a team of only three tofive employees, and more establishedones such as Betterment have now reachedmore than 130 employees. This is still avery small fraction of the number of staff
employed at renowned Wealth Manage-

ment institutes who have thousands of
employees. As Robo-Advisors are young
Fintech-companies, employees often earnmuch lower fixed salaries than in a comparable position with a Wealth Management
firm: they are committed instead to theidea. Frequently, they are also involved as
founders or shareholders of the company
or receive performance-related compensation in order to participate in the firm’s
success. All in all, the two aspects leadto massive savings with regard to salarycosts.
Operating Expenses
Operating expenses include rent, equipment, inventory costs, payroll, marketing,insurance, and resources allocated forresearch and development. Robo-Advisors are - in contrast to traditional WealthManagers - far more flexible with regard
to their offices and facilities. Targeting
visionary, talented employees, most
Robo-Advisors use remote work-places,or co-working spaces with other startups.
This manner of working reduces costs
significantly and increases work motivation. Usually, a desk with a computer isthe main equipment in the daily businessof a Fintech employee. As clients do not
visit the facility in person, there is noneed to invest in fancy office inventory.
By analogy with the online investment
process, marketing activities are also
mainly focusing on online initiatives which
are more cost-effective than traditional
marketing campaigns such as TV-spots
or offline advertisement placements.
Moreover, most administrative processes
are digitalized as well, which saves timeand money for filing documents and otherbusiness-related paperwork.
Digitalization
Robo-Advisory user front-ends are intuitive, user-friendly and provide beneficial
customer support realized by live chats,chat-bots or direct message possibilities
at very low cost, as most processes are
digitalized. For instance, chat-bots offer anarray of pre-defined answers for a variety
of standard questions raised by clients andCost-Income Ratios and Robo-Advisory

allow for customer support outside service
hours without any human involvement.
In addition, compulsory FAQ sections areprovided, and classic hotlines to reach out
to a service agent who is willing to solve
client issues. As Wealth Management
services are almost fully digitalized, accountmanagers focus only on client satisfaction
and retention and do not have to spend
their time in costly client onboarding
processes or risk-profiling appointments
as usually required to meet regulatory
demands. Thus most of the investment
process is digitalized and no longer
requires human interaction.
These means of digital client engagement
are the first steps towards mass-customizing the advisory part by keeping up
with the client in a totally different way.
UK’s renowned Robo-Advisor Wealthify
already uses customized e-mails triggeredby single client portfolio characteristics
measured against market changes to keep
up with their clients on a regular basis,
with one clear goal: signaling the needfor care and encouraging the client toinvest more cash or shift assets within the
Robo-Advisory universe. Calling the investment advisor on the phone in this casemeans only double checking on a proposal
and not explaining the whole investment

proposal from scratch, which in turn
accounts for significant cost and timesavings for Robo-Advisory firms. On top of
that, it ensures intuitive and guided self-direction and on the support side with 24/7
web-based support for handling issues.
Taking all these aspects together, eventhough Robo-Advisors charge much lower
fees for their AuM, one account manager
would only need to manage an average of€ 48.8 million in order to cover the costs
and operate viably in economic terms.
This is less than half of what an advisor
in an established Wealth Management
firm needs. It is only possible because
they operate in a very lean organizational
structure, producing nearly 60 % lower
costs than existing Wealth Managers
by achieving significant cost savings in
respect of personnel, operating expenses,
and through digitalization (see Figure 2).
This results in continually growing costpressure on established Wealth Managers
and banks who must keep up with
Robo-Advisors in order to secure their
existing customers’ loyalty and win new
customers. As we expect the next generation of investors to be more open-minded
for online investment advisory solutions,massive shifts of AuM in favor of Robo-Ad-

Fig. 2 – Savings potential with Robo-Advisory in three pillars

Personnel

Source: Deloitte Consulting GmbH5

OperatingExpenses

Digitalization

visors are very likely. Wealth Managers
therefore need to think of possible solutions to participate in this development in
the near future.
How toIn this context, it is wise to consider integrating Robo-Advisors or its functionalities
into the business model of the incumbents
with the goal of easing the cost structure
and achieving notable savings. As we havepointed out, there are a number of factorsthat allow Wealth Managers to utilize
Robo-Advisory in different ways to enable
new or different revenue drivers and at
the same time optimize the cost-income
ratio for advisory business. The three
options available are to cooperate, build,or create a platform. Introducing a fully
integrated Robo-Advisory offering into theexisting service offering should be seen as
an add-on rather than a substitute to theexisting advisory business.
Cooperate
Wealth Managers can establish a partnership with an existing Robo-Advisory
firm that may only offer B2C, but is also
capable of providing its service as a B2B or
B2B2C solution. The distinguishing factor
when choosing a B2B2C or white labellinginstead of a classic B2B offering is whether
the Robo-Advisory brand will be visible(co-branding) or whether it is fully integrated into the bank or Wealth Manager.
There are plenty advantages in buying an
existing solution that has proven its B2C
capabilities and some Robo-Advisors havealready announced a number of cooperation agreements. Beyond pure technology,
they can be easily attached to the existing
infrastructure, e.g. through APIs. Anothersignificant advantage of such a cooperation is the number of lessons learned thata Robo-Advisor can bring to the table,
helping to build a successful Robo-Advisory offering that attracts not only existingcustomers. Often working with a small
but specialized team, these companies
know how to work with client data as wellas with indirect feedback and act on it in atimely manner. However, one has to keep

Cost-Income Ratios and Robo-Advisory

in mind that in most cases the integration of a Robo-Advisory solution requires
additional implementation support.
Robo-Advisory firms are not capable offulfilling all the requirements needed toclose a partnership with a bank or WealthManager and at the same time run their
daily B2C business. Thus Robo-Advisors
and banks alike prefer to cooperate with
implementation partners. These on the
one hand know how a bank operates andwhat requirements are needed to successfully implement a third party solution
and, on the other hand, can cater for the
much-needed freedom to implement a
distinguishing offering.

advisory business through Robo-Advisory.
Thus, a Wealth Manager can introduce a
new revenue stream by allowing others
to use the platform. While some do not
like the idea of becoming a technology
provider as they do not see the potentialof anonymized client data, which as awhole can enhance the Robo-Advisoryoffering over time. This of course requires
an environment in which such ideas can

Build‘Build’ describes the in-house creation of a
Robo-Advisory offering from scratch whichis integrated into the existing infrastructure and in most cases uses the overall
brand image. It is fair to say that building
a Robo-Advisory offering is a tough challenge, as a number of factors are often
overlooked such as design principles,
customer approach and segmentation,customer support, to name but a few.
The positive fact of building an offering
directed at B2C clients is a high degreeof customization, fitting into the existing
IT-Infrastructure and target operating
model (TOM) alongside the ownership ofclients and their respective data, as thisremains with the Wealth Manager.

Duration

Platform
Firstly, this might include the acquisition of a Robo-Advisor. On the one
hand, buying an established player isa fast way to obtain a desired solution
in a well-developed state as well as therelevant know-how to run the Robo-Advisor. Another and yet widely under-represented possibility is to leverage anexisting platform. This can be based oneither the purchase or cooperation idea
and describes the approach of building
a platform for B2C clients but at thesame time opening up a B2C and B2B2C
platform to local and international companies looking to enhance their existing

Introducing a Robo-Advisory offering using
one of the above-mentioned categories
is not the most difficult part. It is rather
the approach and, once implemented,

Fig. 3 – Deloitte’s modular concept

Services for Wealth Managers

Workshop
1–2 days

Pre-Study
4–6 weeks

Cooperation
2–3 months

Build
2–6 months

Platform
2–4 months

Source: Deloitte Consulting GmbH6

be tested and implemented with time
being the most critical investment, aproblem most banks and Wealth Manager
face at the moment within their advisorybusiness.

Working Packages• Comprehensive market analysis• Competitor analysis• Robo-Advisory impact analysis• Strategic analysis and selection• Cost estimate of the chosen• Project- and milestone planningfor implementation• Deﬁnition of the cooperationagreement• Integration of a White Label RoboAdvisory solution• Integration into IT-Infrastructure & QA

• All-in-one-hand solution• User experience testing by Deloitte
Design Studios & Deloitte Greenhouse• Design Principles and Design Thinking• Implementation of a Robo-Advisor
with B2B2C functionality• Full integration• User experience testing by Deloitte
Design Studios & Deloitte Greenhouse

Cost-Income Ratios and Robo-Advisory

the constant need for innovation that
distinguishes an offering from the competition. It is therefore wise to partner with acompany that has experience in working
end-to-end with their clients rather thanbeing a pure technology provider. Once a
Wealth Manager understands the potential generated by adding a Robo-Advisoryoffering to the advisory business, it isimportant to analyze which specific needs
the Robo-Advisor can address. This is
why Deloitte has developed a modular
concept (see Figure 3) that enables thegradual analysis and an approach tailoredto the individual situation of each WealthManager.
Outlook
Although Robo-Advisory firms have notbeen in the market for very long, theirimpact is already visible. But how they willchange the market in the long run is oneof the most interesting questions. Whichof the above approaches will be the mostsuccessful? The answer is rather simple– it depends. Like their customers, most
Wealth Managers are unique. In somecases it might be wise to make a unique,best-fitting and customized Robo-Advisory offering, in other cases cooperation
is more successful, but without doubt
Wealth Managers will need to integrate
Robo-Advisory in their service offering!
The need to integrate more cost-efficient
service offerings and simultaneously
satisfy changing client needs are thedrivers of Wealth Managers that cannot beignored. Robo-Advisory is the technology
which can provide good services for acomparably low end-customer price andat the same time be the beginning of theintroduction of lean and state-of-the-art
banking technology. The trick is to choose
the best approach to integrate this technology. Comparing, evaluating, and analyzing Robo-Advisory companies and theirdifferent business models is a complex
task. To be able to show weak points inbusiness models, user experience, andother crucial success factors, as well as
finding the perfect match for Wealth

7

Managers, Deloitte developed a scoring
system which will be presented in the next
Robo-Advisory in Wealth Management
abstract.
Deloitte Consulting has a team of dedicated experts who will help you to
examine the topic of Robo-Advisory in
an interdisciplinary way and to position
yourself for the future. Our dedicatedconsultants, scientists, and developers
create meaningful insights, enablingclients to outperform their competition.
Deloitte’s breadth and depth of industry
knowledge helps you achieve innovation
not just once, but consistently over time.
Working with Deloitte’s Wealth and Investment Management practice, will help you
to understand your opportunities in the
Robo-Advisory space.
Deloitte services include:•• Market Development Analysis•• Customer Analysis & Segmentation•• Customer Experience Strategy•• Business Strategy•• Product Leadership•• Applied & Predictive Analytics•• Data Security
In a nutshell, Wealth Managers who allow
themselves to be prisoners of cost-saving topics, regulatory requirements, orare busy defending “the old way of doing
things”, will experience extremely toughtimes in years to come – being innovative
is not a matter of extracurricular activity,
but it is essential to survive. Bringing
Robo-Advisory firms and Wealth Managers
to one table to discuss the value addedby joint use cases may be a real opportunity to take a first step into the future of adigitalized experience in wealth advisory
services.

Contact us
Dominik Moulliet
Senior Manager
Financial Services Solutions
Tel: +49 69 97137 198
Mobile: +49 151 5807 1047
dmoulliet@deloitte.de
Julian Stolzenbach
Manager
Financial Services Solutions
Tel: +49 69 97137 179
Mobile: +49 172 1314 669
jstolzenbach@deloitte.deAndreas Bein
Senior Consultant
Financial Services Solutions
Tel: +49 69 97137 190
Mobile: +49 151 58071 126
abein@deloitte.deIlma Wagner
Consultant
Financial Services Solutions
Tel: +49 40 32080 4531
Mobile: +49 151 5807 0336
iwagner@deloitte.deCost-Income Ratios and Robo-Advisory

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