Social media has changed the way people interact with each other and how they receive and consume information. Is the next step changing the way they invest?
Robo-advisors have become a hot topic in the investment industry recently. Social media messaging service Snapchat is even rumored to be building a robo-advisor service of its own. Could a Snapchat roboadvisor be an indicator that the digital wealth management trend has peaked? Or is it the first cracks in the dam that has been holding back hundreds of millions of young consumers from becoming a flood of new investors?
Given the relatively recent advent of the robo-advisor phenomenon, it isn’t clear how much Snapchat’s success in the field would depend on taking market share from established competitors (including firms such as Vanguard and dedicated robo-advisors Betterment and Wealthfront) as opposed to expanding the market as a whole. With a large millennial user base, many of whom are likely to be newcomers to the investment process, my feeling is that the social media platform’s best bet is the market expansion route.
If the report by Reuters is accurate, it represents a continuation of the trend of social media platforms taking steps to monetize their large user bases by offering them services ancillary to their main function – which is connecting users, in the case of Snapchat.
Some social media networks have stuck to advertising as their primary monetization strategy. Twitter and its adoption of clickable ads and promoted tweets as a source of income is one example of this approach. The popular photo sharing service Instagram has also pursued this method by introducing video ads.
Robo-advisory services represent a different approach to monetization – rather than “pushing” ads to its users, Snapchat’s hope would be that the service is valuable enough to “pull” users into giving it a try. This approach avoids the risk of irritating users by subjecting them to unwanted ads, while running the risk that too few people try the service to justify the investment required to offer it. (See Smart and Agile: Riskalyze and Quovo Help Advisors Stay Ahead of Robos)
How Would a Snapchat RoboAdvisor Work?
There are no details yet as to exactly how a Snapchat sponsored digital advisory service would work. Given that the average age of the platform’s main demographic skews quite young, with more than 2/3 of its users under the age of 25, I doubt that the company is planning a traditional service along the lines of those offered by existing industry providers.
I believe it is more likely that they build functionality similar to that offered by Acorns, which works more like an automated savings app. The Acorns service rounds up your spending transactions and invests the difference in a portfolio that is rebalanced annually. The investing portion of the service is done behind the scenes, without the user needing to select funds or make asset allocation decisions.
Acorns acts more like the “change jar” your parents kept on the kitchen counter where they would deposit the loose coins that were jingling in their pockets at the end of each day. This type of service, as opposed to a traditional advisory model, will be more successful with Millennials and other next generation, tech-savvy customers.
Alexey Sokolin, COO and Partner at robo-advisor firm Vanare, outlined a progression Snapchat could follow in building up its services in this area: “The natural way to build this is to start with media content and viewership (Snapchat has plenty), then move into payments to support interactions and generate financial trust (Snapchat uses Square for Snapcash), then build a savings balance like a pseudo-bank, and then move into capital markets and roboadvice.” (See 3 Thoughts on Why Invesco Acquiring Jemstep Was A Smart Move)
How Are SnapChat’s Users Likely to React?
Moves by social network platforms of all types to monetize their businesses have not always been greeted with stellar results – Facebook’s attempt to sell phones comes to mind. In the case of Snapchat, it’s not clear to me that the their potential plans to provide advisory services are likely to meet with great success if they diverge too far from the model pioneered by Acorns.
This has more to do with the demographics of the platform’s audience than any lack of trust. In my estimation, the Millennial generation is more likely to work with non-financial entities than any preceding generation. Individuals in this generation have experienced a tectonic shift in attitudes towards such businesses in the course of growing up with smart phones and social media as an integral part of their lives. However, while they might be comfortable setting aside funds via a service sponsored by a social media platform, their interest in or ability to invest at this point in their lives may be limited. This is why I believe an enhanced savings app is more likely to be successful for Snapchat than a full feature robo-advisor at this point. (See Why Demographic Differences Define How Advisors Should Talk to Clients)
Sokolin sees the Millennial generation as a likely target for tech companies entering the robo-advisor space: “It is not surprising that Snapchat, and the other rumored tech companies, would consider the roboadvisor space,” he stated. “Millennials are disillusioned with traditional sources of authority — banks, government — because of the Tech Bubble and the Great Recession. We grew up watching the country and its financial institutions struggle, and the only thing we really trusted was personal technology.” As a result of this, “trusted brands in the mobile ecosystem have a tremendous opportunity to challenge the financial services industry with homegrown payments, trading and advisory solutions.”
What Would Snapchat’s Entry into the Sector Mean for the Industry as a Whole?
If a Snapchat roboadvisor service does get up and running, its success is likely to play a large part in determining whether its competitors follow suit. Facebook, with a tremendous share of eyeballs as measured in social media platform visits, might seem the likeliest service to join in. With its large embedded audience already accustomed to providing details about their lives on the service, placing investments there could seem like a logical next step. This would be a natural move for the company, as Facebook already offers the ability to make payments and sell products through the site.
One potential concern for Snapchat, Facebook, or any other non-investment firm considering sponsoring robo-advisory services, is the issue of investor education and expectations. Financial innovation has been said to peak towards the end of bull markets, as the optimism engendered by rising markets leads to new investment instruments attempting to take advantage of the positive mood.
However, when the markets turn negative, as inevitably happens in the cyclical world of investing, the public’s appetite for innovation is likely to become less avid. This idea as related to robo-advisors was discussed here. The article doesn’t criticize the computerized allocation services themselves, but rather expounds on the idea that their current popularity, given past investor enthusiasm for innovation during roaring bull markets, is a potential sign of a market peak. (See 7 Best Practices of Successful NextGen Advisors)
Sokolin agrees that social media and other tech firms considering the space face a number of challenges. “Tech companies generally do not appreciate the heavy infrastructure and regulatory complexity of financial services,” he said. “A media property like Snapchat would be better off partnering with an existing financial institution or private-label technology, like Vanare|NestEgg, that is purpose-built for this usecase, in the same way they leveraged Square for Snapcash. This would also avoid potentially exposing the media content as investment advice, and putting the core business at risk.”
Market Volatility, Social Media and Robo-Advisors
The rocky start to the markets in 2016, coming after a long period of upward momentum which ended in 2015, may present challenges to firms such as Snapchat as they attempt to roll-out robo-advisory services. Falling markets could serve as a trial by fire of sorts for social media sponsored robo-advisors. The ability to remain committed to an investment plan in the face of turbulent markets is a hallmark of successful investors – if social media, with its ability to rapidly spread information and advice, can get this idea across it should help such services gain traction.
Alternatively, if this message doesn’t get through to potential users of a Snapchat Roboadvisor, adoption of the service is likely to suffer in the face of market turmoil. If this proves to be the case, and unstable markets dampen the enthusiasm of investors for this and other robo-advisory services, it may turn out that Snapchat’s planned robo-advisor would be seen as a negative – the signal and start of a downward market cycle.