Sprinting the marathon of building a Finance 2.0 company
Or, Why it takes hundreds of millions of dollars of VC money to get scale
The last few weeks and months have been incredibly busy for most of the Internet-enabled investment advisors or robo-advisors, as they’re known in the industry. Almost all the major players have raised substantial amounts of money from headline investors.
That’s great, because robo-advisors are going to need all the money they can raise.
What happened?
Last week, Betterment ($32 million) and Learnvest ($28 million) raised pretty massive VC rounds
That comes after another robo-advisor, Wealthfront put the final touches on a $35 million round.
All the usual suspects are placing their bets on the future of asset management: Index, Accel, Bessemer, et al have horses in this race for a market that, unlike many other entrepreneur pitches, has 12 zeroes in TAM (the asset management business is calculated in the trillions of dollars).
We all know the asset management market is ripe for change and these financings — these companies, really — have been years in the making. We’ve known this at a gut level (man, banks and brokerages suck) but it wasn’t until these massive rounds closed that the financial industry itself appeared to recognize the profound change that’s happening.
The changing of the guard — new investments and new partners
In addition to A-list VCs, we saw various old-school investment arms — the investment arms of the asset management industry itself — participate in these rounds. Northwestern Mutual Capital, American Express Ventures, Citi Ventures all now invested in the next generation of asset managers.
What’s also interesting to witness here is that Betterment, long known for its dirt cheap, easy-to-use, slick UI for portfolio management, has future plans to scale with its own, new, institutional offering, Betterment Institutional. This service partners with existing investment advisors to help them grow their practices on the Betterment tech stack.
Here’s Steve Lockshin, Partner in Betterment’s new service:
As an investor in and advisor to Betterment, I’ve had the pleasure of seeing up-close how Betterment’s technology and services can aid consumers and professionals alike. Betterment Institutional, which I started in collaboration with the team at Betterment, will offer a solution to financial advisors that both keeps their services current and expedites clients’ journeys towards reaching their financial goals.
Betterment Institutional reinvents the consumer experience and exponentially increases advisory efficiency, keeping advisors where they belong — in front of their clients.
Financial disruption requires a VERY LONG gestation period
I’ve been writing about the Finance 2.o for years on the consumer side (Tradestreaming) and for advisors interested in utilizing best practices and new technologies to build modern practices (New Rules of Investing). I’m even a partner in one of the leading equity crowdfunding platforms — something I think is one of the most disruptive things to hit finance since discount brokerage/online trading.
And that’s the point — I’ve been writing about these same firms and consulted to quite a few of them and I basically came to the conclusion that the current players are probably going to be the winners long term. But I got frustrated — frustrated watching the Airbnb’s and Facebooks get huge while those of us in online finance built our firms bird by bird.
It’s going to take years and a lot of money to displace huge financial companies, however tarnished, that spent billions on creating their brands. Many investors would still rather give their money to Merrill Lynch to manage than Wealthfront, even though you could argue WF has a stronger balance sheet.
Michael Kitces, a CFP and a good observer of the cutting-edge of the financial planning industry, thinks there might be a bubble in robo-advisors right now. Even so, he thinks something transformative is under way…
Ultimately, I do think we’ll look back at this 2009-2014 era as the one where the core construction and implementation of a passive, strategic portfolio became commoditized by technology for an ultra-low cost, in a transitional moment as seminal as what Vanguard’s first launch of the index fund has been slowly and steadily doing to the world of stockpicking and mutual fund managers for the past 40 years.
In their effort to displace the lower-hanging fruit in the asset management business by creating their own low-cost, plain vanilla allocation models, most robo-advisors dropped prices to something like 25 basis points on the assets they manage.
That means, they need tens — hundreds — of billions of dollars under management to turn into thriving, profitable businesses. It’s taken them a long time to get to this point (Wealthfront has $800M under management according to its website). Many leading financial advisors, Michael Kitces reminds us, have billion dollar portfolios and operate with a lot less infrastructure, both human and technological.
So, the race to win Finance 2.0 isn’t just a marathon — it’s a marathon that these robo-advisors must sprint to compete with the incumbents (be it exchange traded funds (ETFs), indexed mutual funds, or the online brokerage platforms for DIYers) and keep up with one another.
Betterment, Learnvest, Wealthfront, Personal Capital, Motif Investing and others are all raising large institutional investment rounds from the very companies they’re looking to displace. The writing is on the wall for traditional asset managers.
But, it’s going to take another decade before these companies become household names.
