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Ella Rabener and Simon Miller are the co-founders of Scalable, an online investment manager backed by former Goldman Sachs employees.Seamus Murphy for The Globe and Mail

The robo investing-advisory industry is in its infancy and already the market pioneers are talking about the inevitable shake-out to come as new competitors arrive in droves.

In Europe and the United States, less so in Canada and Asia, robo advisers – also known as digital wealth platforms – are multiplying quickly as they spot the opportunity to automate asset allocation for investors.

Despite the market's huge potential, almost none of them are making money and their demands for capital to meet everything from mandated regulatory capital cushions to customer acquisition costs is not cheap, suggesting that many will fail, seek partners or sell their business to big-name investment firms or banks that want to get into the robo business.

"Eventually, M&A will get very big in this space," said Simon Miller, 30, a former Barclays commodities trader who is co-founder of Scalable Capital, an online investment manager backed by former Goldman Sachs employees that launched in Germany and Britain this year.

Deutsche Bank, Germany's biggest bank, has a similar view. In an August note called "Robo Advisers, when machines manage your assets," analysts Thomas Dapp and Philipp Büchner said: "As hardly any companies are generating profits with their existing robo advice strategies, consolidation will be unavoidable."

Deutsche Bank, which is itself launching a robo adviser, called maxblue, thinks that the traditional banks, with their financial muscle, regulatory expertise and ability to generate massive amounts of financial data, are the logical invaders of this relatively new financial technology space.

It is not alone in sizing up the robo game and taking the plunge. In March, Goldman Sachs bought a small fintech startup in Texas called Honest Dollar, a digital retirement savings platform. Like almost all other robos, Honest Dollar selects exchange-traded funds (ETFs) for its clients after measuring their tolerance for risk.

For more than a century, asset allocation and investing advice have typically been the province of financial advisers in human form. The new breed of robo advisers typically use algorithms to allocate assets while largely dispensing with advice, on the belief that "robots" – in reality, algorithms – can perform as well as human advisers at far less cost to the client, boosting their long-term returns.

Scalable's fees are 0.75 per cent per year of the assets in the client's portfolio. The figure rises to about 1 per cent when the 0.25-per-cent ETF fee is included. Still, that's far less than the fee of 1.5 to 2 per cent typically charged by flesh-and-blood investment advisers.

Nutmeg, probably the biggest name in the British robo industry (it doesn't publish the tally of its assets under management, making its size impossible to verify), charges a fee of 0.3 to 0.95 per cent, depending on the size of the portfolio.

Nutmeg launched its digital wealth platform in 2012, the first to do so in Britain and among the very first in Europe (Nutmeg does not technically call itself a robo because its business, while highly automated, is not actually based on an algorithm).

The robo space has been filling up since then. Among Nutmegs British competitors are Scalable, Wealthify and MoneyFarm, with many more in the pipeline. Some of them are little more than holding pages on the Internet and may not get launched, depending on their ability to raise investor capital; others are serious.

Britain's biggest banks, among them Royal Bank of Scotland, Barclays, Lloyds and Santander UK, are all planning to launch robos as defensive responses to the rise of Nutmeg and its ilk. South Africa's Investec is launching a robo too. In the United States, the big robo names include Betterment, which has more than $4.2-billion (U.S.) of assets under administration, and Wealthfront. In Canada, there are about a dozen robos, most of them small, including Justweath Financial. The Canadian banks will inevitably hit the robo market too; BMO Nesbitt Burns, through BMO Smartfolio, is one of them.

The potential size of the robo market is huge. A recent study by British management consultants Oliver Wyman said that, in 2015, the global assets managed by robos was just $30-billion (U.S.). It expects the figure to rise to $500-billion by 2020.

While the potential market suggests that there is room for hundreds of robo companies, the launches will not be easy. The startups have to compete for investment capital and be able to fund losses for years. Nutmeg has raised $50-million (U.S.) so far. Scalable has raised €11-million and is seeking a lot more.

Marketing costs are high – they have to build brands – as are regulatory and technology costs to ensure privacy. They will need to expand their portfolios beyond ETFs and target wealthy investors as well as investment neophytes – all extra development expenses. Some will offer hybrid services, a mix of automation and personal advice. "These businesses require a lot of capital" said Shaun Port, Nutmeg's chief investment officer.

Since the marginal cost of adding customers is low, the strategy is to pile on as many new accounts as possible. "These are volume plays," said Manuela (Ella) Rabener, Scalable's co-founder and chief marketing officer.

That means staying power. Scalable will need assets of €800-million to €1-billion to break even, Ms. Rabener said, implying the need for 10,000 to 15,000 clients, up from about 1,500 at last count. Unlike Nutmeg, which is entirely focused on the British market, Scalable, already present in Germany and Austria, plans a pan-European business, which should speed up the customer-acquisition effort.

Both Scalable and Nutmeg agree that not everyone is going to make it and that consolidation is inevitable. With banks like Goldman Sachs already prowling the robo market, the consolidation phase could start fairly soon. "I see some of the small ones bought for their technology, not their customers," Mr. Port said.

Who will the winners be in five years? It's impossible to say, but banks, which are typically not innovators but will buy innovative companies when they become a threat to the banks' business, seem likely to emerge on top. The disruptors are likely to push the disrupted into action.