Have robo-advisors peaked? A conversation with Silver Lane’s Peter Nesvold
Earlier this week, a report out of Silver Lane Advisors, an investment banking boutique that specializes in financial services M&A, caused quite a stir. The report, entitled “Have Roboadvisors Jumped the Shark“, drew parallels from the advent of Internet banking to the more recent phenomenon of automated investment advisors, or so-called, roboadvisors.
One of the author’s of the report, Peter Nesvold, is a managing director at Silver Lane. He joins Tradestreaming to discuss the report, the future of asset management, and how he thinks it all plays out.
In your study, you spend considerable time using the growth trajectory of Internet banks as a parallel case to what’s likely to play out for roboadvisors. Why is that?
There’s an old saying from Mark Twain that “history doesn’t repeat, but it does rhyme”. We find that the investment thesis of today’s independent roboadvisors bears a striking resemblance to that of the original fintech disrupters — the Internet-only banks of the 1990s.
Fintech disrupters are, by definition, gunning for dramatic, sweeping changes to how financial services are consumed. While it’s almost a forgotten chapter of fintech history, online banking is actually the most successful fintech innovation of the past 20 years. People often talk about how online brokers disrupted traditional brokers during the 1990s. But even today, online brokerage is only about 30% of the retail market. In contrast, an incredible 80% of U.S. households with an Internet connection bank online. The convenience factor is extraordinary. But despite this massive consumer adoption, all of the standalone, Internet-only banks failed! That’s because online banking is not a standalone business, but rather a product extension of traditional banking.
If we look at this purely as a technology, online banking in the 1990s and online/automated investment advice of today share many characteristics. Both are incredibly innovative technologies that enable users to transact whenever, wherever they want; the marginal cost of serving each incremental user is very low; yet in both online banking and online investment advice, the offering is really just a subset of the broader portfolio of services that the user is likely to need over time.
Why do you think that roboadvisors may have jumped the shark?
Two events have happened in recent quarters that suggest we’ve hit an inflection point. First, and probably most importantly, we’ve seen mega-brands jump into the market and completely overpower the progress of the start-ups, despite these huge companies having sat back for years as idle observers. Schwab and Vanguard — two industry behemoths — netted more assets in only 90 days from launch than the independent roboadvisors had their entire lives. The exact same thing happened with Internet banks in the 1990s. While players such as Bank of America were arguably slow to follow the lead of innovators such as NetBank, BofA completely leapfrogged the start-ups in only 90 days once they decided to jump in. Now that the big boys are interested, the start-up robos will have to pour an extraordinary amount to capital into brand building and raising service levels to compete. Forget what Twain said, this isn’t history rhyming, it’s history repeating!
Second, we’ve started to see consolidation begin. LearnVest sold to Northwestern Mutual; FutureAdvisor combined with Blackrock; and Covestor merged with Interactive Brokers. A small number of independent robos still have a chance to grow into big businesses; the further down the list, however, the more urgent it likely is to find a suitable partner.
How can robos avoid jumping the shark?
Using history as a guide, the Internet banks whose DNA survived were those that affiliated with larger brands. Wingspan Bank is a good example — although the Internet-only bank was always a wholly-owned subsidiary of Bank One, it was branded and managed independently of its parent. You never saw Bank One mentioned in any of its ads. But after a little more than a year, Wingspan was folded back into the parent to become the online offering. That made sense.
Likewise, TeleBank (once a publicly-traded Internet bank) sold to E*Trade at the peak of the market and still survives today as the brokerage division’s banking arm. In contrast, those Internet banks that did not affiliate with a bigger brand in some way all disappeared.
We believe that independent roboadvisors should consider aligning with larger, established competitors — provided those competitors are equally forward-thinking. We noted some recent examples above. Combining innovative technology with a highly credible brand seems like the best path.
If they have jumped the shark, what do you think happens going forward for the robos? For competition from within the industry (Vanguard, Schwab)? Who’s positioned well to “own this market”?
To be fair, it’s important to keep in mind that the TV series, Happy Days, survived for five more seasons after the “Jump the Shark” episode. In its truest form, a “JTS moment” doesn’t mean the end has arrived; it suggests the downward ascent has begun. There are plenty of episodes ahead for the roboadvisor trend; we just believe that the most innovative days as independents has now peaked.
In terms of who’s best-positioned to own the market: it’s a billion-dollar market that’s likely to be captured by billion-dollar brands. Early movers from the traditional brands include Vanguard, Schwab, Fidelity, Blackrock, Northerwestern Mutual, and Internactive Brokers. We anticipate someone like State Street or Invesco making a move as well, as a robo platform would be a logical distribution channel for their tremendous ETF product offerings.
Is this market saturated? Where will new competition come from and why?
The market isn’t saturated yet, because consumer adoption has been relatively slow. Even smaller, independent roboadvisors will attract assets — but the key is that they are unlikely to attract so many assets that they scale to material profitability. New competition keeps coming into the market. We probably see new entrants weekly; on paper, the business plan can look really exciting to a venture capitalist who understands technology but has limited experience in the financial services industry. But anyone jumping in today faces an unusually difficult uphill battle.