Why Amazon won’t enter the advice market

Despite what many see as the inevitability of tech giants entering the financial advice business, the economics of doing so — as well as the intensely regulated nature of the business — make their entry unlikely, according to a new report from Cerulli.

The Boston-based research firm says that “companies like Facebook, Amazon, Apple, Netflix and Google (FAANGs) have the tools and data to excel, but face significant obstacles that will likely preclude their entry,”

One major obstacle, Cerulli says, is the relatively small size of the market. The firm estimates that the “digital advice opportunity segment” represents only about 12% of investors, or a segment “that would be difficult to scale to be of strategic interest to the world’s largest technology providers.”

Cerulli noted that investors consider transparency to be the most important criterion in choosing an adviser. Since FAANGs’ overriding fiduciary duty is maximizing shareholder value, building long-term trust in potential investor clients would be difficult, Cerulli said.

The ability to add “a scalable human advice element to digital platforms” also will dissuade large tech firms from entering the field, Cerulli says, because experience has shown that “even investors who thought they would prefer purely digital self-service relationships frequently want discussions with human advisers.”

Recent reports that Amazon is in talks with large financial institutions including JP Morgan Chase to explore a new “checking-account-like product” spawned concern among advisers that the next step for tech giants would be financial advice.

“Advisers have their head in the sand; they are in denial,” Ric Edelman, the founder and executive chairman of Edelman Financial Services, told InvestmentNews. “Many think [Amazon’s likely move into banking] won’t affect them or their clients. I think most advisers are wrong. There were probably a large number of buggy manufacturers that were saying the same thing in 1910.”

This story includes material from a story previously published in InvestmentNews.