Robo-advisors: not dead yet!
A year ago, we wrote the following incendiary post at Techcrunch.
Will 2015 See The Death Of The Robo Advisors?
It was more tongue-in-cheek than rhetorical. Though it caused sufficient concern at the robos for one of the CEOs to write a rebuttal.
So, what happened?
No, they didn’t die, thankfully. Robos have triggered some great innovations in finance. And consumers are reaping the benefits of cheaper more accessible investment plans. We like them. Promise.
But the core prediction of our article, that the incumbents would go on the offensive, did come true. With dramatic results.
In less than 3 months, Schwab powered ahead of the new-entrants. Vanguard’s Personal Advisor Service was an even bigger success, though that was partly driven by it’s parent seeding the new business with $10bn of assets.
The reaction by the new-entrants varied. From Wealthfront’s CEO, Adam Nash writing a poisonous teardown of Schwab Intelligent Portfolios to others saying the entrance of the big-boys validated their business model. Um, splutter, cough.
As 2015 progressed, the infighting got ugly with the CEOs of Wealthfront and Betterment (Jon Stein) slagging each other off publicly. Even Blake Ross the celebrated co-founder of Firefox, chimed in to slam the nascent industry with an article titled:
Silicon Valley Tech at Wall Street Prices!
Which is about as nasty a suggestion as possible. What? Putting the demi-god do-gooders of the Valley in the same sentence as the villains of Wall Street!
And finally to wrap up a nasty year, in November, Fidelity declined to extend its exclusive deal with Betterment. Yes, you guessed it, they are going to build there own robo.
No deaths, but several departures
Fortunately the robo industry has lived to fight another year. There were no actual casualties. Though 4 companies have lost their independence.
- Earlier this month, Jemstep was acquired by Invesco, one of the world’s largest asset management firms. Jemstep itself had pivoted from being a consumer-facing robo to being a robo-tool for investment advisors. No price was disclosed. :(
- Back in August, FutureAdvisor was acquired by BlackRock, for a rumoured $150 to $200m. BlackRock is the largest asset manager in the world.
- In March, LearnVest was acquired by Northwestern Mutual for a rumoured $250m. Though as one commentator pointed out, LearnVest is as much a financial planning tool as it is a robo.
- In February, Upside was acquired by Envestnet. Again for an undisclosed sum. Like Jemstep, it had morphed from a consumer-facing robo to being an advisor tool.
That leaves Betterment, Personal Capital, and Wealthfront in the big-league. With a few other players, knocking round too, including some notables like Acorns, Blooom, Motif Investing, SigFig and WiseBanyan.
What does 2016 hold?
Firstly, it’s hard to see the new-entrants catching up with Schwab, let alone Vanguard. Rumour has it Schwab spent over $40m on it’s robo’s launch. Check out the ads, if you’re in any doubt.
Secondly, we can expect a few more players to roll-out robo-offerings. Think Merrill Lynch, Morgan Stanley and Wells Fargo, to name a few.
Thirdly, there are other, tech-savvy web based asset management / advisory firms that have yet to get the same media-love as the VC backed robos. Expect to hear more from them. Some of the names will surprise you, as will their size. Had you thought of Financial Engines ($100bn of assets), Morningstar ($6bn), the Motley Fool ($800m) or Zacks ($4bn)?
Fourthly, it’s hard to expect anything but a rocky 2016 for financial markets. The S&P 500 has seen its earnings decline for the first time since the Great Recession. The Fed has started to tighten rates. The percentage of companies defaulting on their debts is rising. Emerging markets are suffering. So, for the new-entrants, this is going to be an unhelpful environment. In times of fear, selling a new financial product gets tougher.
Oh, and finally, don’t forget that VCs like to make money. So with all the increased competition and fear, they’ll probably bully the robos’ management teams to sell out to the incumbents. i.e. Expect more deals. Bigger deals.
“Hey Jamie, interested in buying my robo …”
Because I am a data junkie, here are key data points from the latest filings at the Securities and Exchange Commission.
It’s not an exhaustive list of robos that are registered investment advisors. Sorry. And the figures differ slightly to the chart above, as the reporting dates and legal entities sometimes differ.
With those caveats in mind, the stats are fascinating. Assets per account and assets per employee vary widely. You can readily sort the men from the boys.
The established firms
At the established firms, both the scale of the business and the large size of each account is striking.
Of the leading new entrants, AssetBuilder & Bill Harris’ Personal Capital are the ones closest to mirroring the assets per client of the established firms.
Clearly, Betterment, FutureAdvisor and Wealthfront are breaking new ground in asset-management, targetting a different demographic.
Other robos, advisors and new-entrants
Within the catch-all group there are lots of players that are clearly sub-scale. Though several of them could break-out of the group or build a niche business.
My rule of thumb is, for every 10 employees, a robo probably needs $100m of assets, to be sustainable. There will always be exceptions, but it’s a useful rule to identify who’s got staying power.
If you are interested in the underlying data, you can access the Google spreadsheet here. And if you are annoyed that your firm is missing, please leave me a note and I’ll do my best to add it!