We continue to see Robo advisory firms mushrooming in 2016; Every large bank is starting their own or partnering with an existing Robo Adviser offering low-cost online investment guidance to its client base.
In the past month itself, we saw three large financial behemoths entering into the industry.
SigFig Wealth Management LLC raised additional funding, from investors which include UBS Group AG and Eaton Vance Corp. for $40 million at an undisclosed valuation.One of the biggest such “Robo Advisors” Betterment LLC, raised $100 million in March to give the firm a $700 million valuation. Another such startup Personal Capital Advisors Corp. additionally raised $75 million not so long ago. We believe SigFig -UBS deal to bring about a radical change in the Industry,
We believe SigFig -UBS deal to be an Important landmark in the Industry.For the readers who are not familiar with the WM industry ,UBS is the largest Wealth Manager in the world managing over half of the industry wealth.(see chart)
UBS has been a late entrant in the Industry but what it has lost in time can be makeup by leveraging on its existing client base.
UBS’s America’s wealth management Deal with SigFig will see the digital wealth manager develop new proprietary technology and investment tools for the Swiss bank.The deal also involves creating a research group to develop new wealth management technology tools for UBS advisors to use. For UBS it was a build or a buy decision, and buying seemed to make sense as they are already late to the party.
For SigFig, this all makes complete sense.First, it gives them access to the huge scale. Secondly, tieing up with a behemoth like UBS helps them to focus on their core competency which remains coming up with new technologies in the WM space.
Online discount broker E*Trade became another entrant, announcing the launch of its Adaptive Portfolio tool
E*Trade adaptive Portfolio will be relatively tightly integrated with help from personal advisors. It also intends to pursue active investment management, rather than relying solely on index funds and ETFs.From a cost standpoint, this, of course, is more expensive that the other startup peers . But promises to offer much more in the long run.
The Adaptive Portfolio assigns customers to one of six risk profiles based the usual short, questionnaire that we have come to associate with Robo Advisors. Once customers sign on, their funds are allocated among stocks and bonds in a portfolio that automatically rebalances to stay in line with that target.Furthermore, the adaptive portfolio offers clients regular access to an E*Trade account team.
This is a good step, as it offers the chance to Non -Millenials who are more dependent on human interactions for their investment decisions.Moreover, it also provides a much-required validation & reinforcement that a Robo-advisor cannot provide.
E*trade is not the only one who is providing such a hybrid service, quite recently Capital One became the latest financial company to offer both computer-generated portfolios and living, breathing advisers.The service, called Advisor Connect, will link its U.S. clientele to certified financial planners on the phone. While customers get best of both the world, participating advisers are compensated through a salary and bonuses structure. Hence, they too have an incentive to do better than the rest.
To our regular readers, the service would sound similar to Personal Capital, which launched around 2011. Personal Capital charges marginally less than Capital One, 0.89% on the first $1 million, to manage assets compared to Capital One’s 0.9%.
The writer cannot stop himself from comparing modern day Robo Advisors to the late 1990’s Stock broking revolution in India. In India the earliest stock broker was SHCIL (stock holding corporation of India) a govt owned public limited company .Demat and online trading came late in India , If you didn’t want to own certificates of individual companies , you had to go to these guys. Once trading in dematerialised shares/online trading started the number of private stock brokers mushroomed everywhere. The competition was fierce everyone trying to outdo the other in terms of brokerage rates. Hiring & firing was rampant and monthly brokerage targets started getting stricter . It became so competitive that you had no clue if your client adviser had shifted broking houses since the last time you spoke. It was interesting to see SHCIL managers react to this since they didn’t react at all. Instead, they were quite supportive in helping clients switch brokers. Most people thought since they were govt employees they didn’t care as much , they merely cared about their salary that was guaranteed with no brokerage targets. But to everybody’s surprise the case was entirely different , the accounts the private brokers were poaching were mostly small retail accounts . They couldn’t get a foothold on the institutional market as the institutions preferred the safety of SHCIL compared to any private Broker. Till date, SHCIL remains the largest financial custodian for financial institutions in India. While most private brokers perished one after the another.
The reason for the long story is to reflect that the success of Robo Advisors depends on increasing adoption by institutional clients.Though we see companies making rapid progress in the industry it would not be fair to say the industry is extremely conducive for newcomers.
The biggest challenge in the industry continues to remain customer acquisition . according to industry estimates, it takes upwards of $1000 to acquire each new client.
If market stats are to be believed, Betterment earns less than $100 each account. The average investment size being around $27000 -$30000. The problem is the Assets under management, which although has grown rapidly in last few years isn’t quite at the scale to break even.
Often in the world of Stocks , It’s sacrilegious to talk about valuations of companies in certain sectors. In 1990’s it was computer component manufacturers , these were the fellas that just had to be brought if you asked them about valuations they would look at you if you just landed from MARS. This disease manifested and became widespread in 2000 using the .com companies as a platform . In 2016 the same behaviour can be clearly seen in three trends ( we won’t call them industry as of now) namely Blockchain , IOT(Internet of things) and lastly our beloved Robo-advisors.