The buyout that caught my attention this week involved fintech wealth management firm Wealthfront. UBS — the largest private bank globally — bought it for $1.4 billion.
The acquisition got plenty of press. Several articles focused on the low buyout price. For venture capital (VC) firms in particular, $1 billion just doesn’t do it anymore. VC funds have grown very large and expensive. These days, they need multibillion-dollar liquidity events to make a decent profit for their limited partners.
Other articles focused on the “fake” disruption promised by robo advisory services. Instead of kicking old-fashioned banks to the curb, robo advisors are being taken over by banks one by one. In 2020 it was Personal Capital, which was sold to Empower Financial for $1 billion. This year it’s Wealthfront. And next year? Perhaps it’ll be Betterment — the last of the major automatic wealth management companies that’s remained independent.
You might think banks are using these robo advisors to provide better and more affordable digital financial and investment planning services, right? Unfortunately, that’s not always the case. LearnVest, GuideFinancial and Upside were all shut down not long after being acquired.
I think there’s a pressing issue that needs to be addressed, one that the mainstream press has ignored. With Betterment being the last independent pre-IPO robo investing company standing, have we seen the end of innovation in the automated wealth management space? Has startup disruption run its course?
It’s a fair question. We’ve seen many of the big banks buy their way into the robo advisory space. The vast majority of legacy financial firms are either developing or currently offering robo advisory services. Vanguard has two levels of services with more than $200 billion in its digital investment platform. Jamie Dimon, the CEO of JPMorgan Chase, admits his company’s robo product isn’t “good enough yet but it’s got $55 billion without us doing virtually anything and no marketing.”
Those are major incumbents that any startup would struggle to compete with. But startup disruption in this space isn’t about kicking banks to the curb (if it ever was). It’s about finding holes in the robo advisory industry, plugging them and scaling with margins that allow profit.
The first wave of robo advisory startups is just about over. The second wave hasn’t quite arrived, but it’s coming. And it will need to accommodate a predominantly digital native customer base. These are folks who were born in the digital era and are immersed in automation.
To be successful, the new crop of robo advisors will have to provide an impeccable digital user experience — one that’s fast, easy to use and accessible via smart devices. They will also have to personalize a generous range of investment choices with advanced AI that can predict what choices users prefer (which the platform or app could then suggest).
Perhaps most challenging, these services will need to be affordable for adoption to grow into the hundreds of thousands and then millions of users.
Achieving widespread (but not necessarily massive) adoption, affordability and profitability won’t be easy. Signing up customers is expensive. Affordability and profitability depend on these companies finding ways to make money outside of the investment fees they charge. I think we’ll see more robo advisors adopt neobank models, where banking services can supplement investing fees while offering near end-to-end solutions that should nudge customers away from legacy banks.
This is not great news for VC firms. The second wave of robo advisors is bound to be more niche in selecting the holes they want to plug. Billion-dollar buyouts would still be possible — perhaps even the norm — but multibillion-dollar outcomes? That’s probably a bridge too far.
A mutual parting of the ways between robo advisors and VC investors means these startups will increasingly raise their funds from investors like you using crowdfunding. Not all of them will be great or even good investment opportunities, but some will.
And I’ll be on the lookout for those opportunities. One of the first out of the gate in this new wave of robo advisors is Beanstox. It’s raising on StartEngine at a valuation of $27 million. Kevin O’Leary — of “Shark Tank” fame — is the company’s co-founder, chairman and brand ambassador. It’s worth checking out.