Artificial Intelligence

The future of roboadvisory, as seen by a top fintech investment bank

  • Roboadvisor hype is calming down as reality sets in
  • Still, robos are next step in passive investing evolution
close

Email a Friend

The future of roboadvisory, as seen by a top fintech investment bank
It happens in every industry technology enters -- in big markets like finance, the opportunities are so vast that new disruptive entrants receive a level of hype that way outstrips their current situation. Money pours in, valuations go up and then, as Gartner describes via its firm's hype cycle methodology, this peak of inflated expectations crashes and becomes a trough of disillusionment. roboadvisor mentions in the press 2015 was a year of super high hopes for the robos. Standalone asset managers like Wealthfront and Betterment were seen poised to take over the world, set to become the next Goldman Sachs and JP Morgan. Somehow, though, too much lemonade was drunk and everyone seemed to overlook just how hard -- and expensive -- it is to acquire new customers as a stand-alone asset manager. If last year was the peak of inflated expectations, 2016 is turning out to be the year that robos get their shit together. Sure, some of the top firms are raising more money and some smaller ones have gotten taken out, but it seems expectations are getting realigned and realistic, as the hard work of building these businesses begins in earnest. FT Partners, a boutique fintech investment banking firm headed by Steve McLaughlin, has essentially owned the transactions in the roboadvisor space. The firm recently published a 141 page presentation on digital wealth management and we pulled out just some of the salient features for you below.

Robos are next step in passive investing evolution

roboadvisors and passive investing The story and excitement about roboadvisory isn't just a tech story -- it also has to do with another general trend in investing: the move away from active fund management to passive forms of investing. Over the past several years, money has flowed directly out of actively managed mutual funds and into their lower priced, mainly-indexed cousins, exchange traded funds. Large money managers are abandoning trying to beat their benchmarks and moving their portfolios into passively-managed strategies, as evidenced by the fact that over one third of all managed money is now in ETFs or other index products, up from 20% in 2009. In The Insider, 60 Minutes' Mike Wallace interviews Jeffrey Wigand, a Big Tobacco industry insider who turns informant. "That's what cigarettes are for: a delivery device for nicotine," the informant said. "Put it in your mouth, light it up, and you're gonna get your fix." Similarly, because they're cheap, easily managed, and ubiquitous, roboadvisors are a great distribution tool for ETFs, and that's why firms like Schwab and Vanguard have launched different flavors of roboadvisor platforms -- to help distribute their own ETF products.

Same technology, different target clients

roboadvisor competition and number of accounts

Roboadvisory is a growing, crowded market. Startups and incumbent financial institutions' offerings tend to blend together. Some are purely software-driven, while others are hybrid offerings, combining software with a human touch. So there's not really that much differentiation on the outside packaging. But when you begin to drill down on the largest players, it's clear that their businesses are very different. Personal Capital has the highest average account size ($125,900) and Acorns, which, at its core, is an app to encourage millennials to save more, has the smallest account size ($156). Some robos target the mass affluent while others have moved downstream, to collect every nickel and dime its users can spare. It will be interesting to watch the different techniques robos employ to ramp their AUM. Future M&A activity will be very much predicated on roboadvisors' client makeup and marketing chops.

By the look of things, M&A is just getting started

mergers and acquisitions of robo advisors Of course, no banking slidedeck would be complete without a recent transactions slide. There have been a number of recent deals in which an incumbent asset manager acquired a roboadvisor. BlackRock, Invesco, and Goldman Sachs have chosen their racehorses by buying instead of building their own. Others incumbents, like Schwab and Vanguard, have built and launched their own robo offerings. FT Partners believes that as more capital flows into the space, there will be more M&A and partnerships to come in the space: "A number of newer firms are likely to be acquired by larger organizations that are looking to add or deepen their digital wealth management capabilities while only a relatively small number of new consumer brands are likely to achieve the level of scale (and funding) they need to survive on their own over the long-term," the firm wrote.
Photo credit: Arthur40A via Visual Hunt / CC BY-SA

0 comments on “The future of roboadvisory, as seen by a top fintech investment bank”

Artificial Intelligence, Partner

The Future Unveiled: Generative AI’s influence on financial institutions, from Customer Care to Fraud Prevention

  • In finance, generative AI transforms customer service with advanced conversational AI and NLP, boosting satisfaction and revenues.
  • Additionally, it impacts fraud detection by crafting synthetic data, cutting false positives and improving detection rates significantly.
Jacqueline White, i2c | November 16, 2023
Artificial Intelligence, Partner, Payments

The AI Effect of the future of payments

  • Technical innovations like generative AI can push the bounds of global commerce
  • Visa’s new AI Advisory Practice will aid businesses in the payments sector to unlock the potential of artificial intelligence (AI) and utilize generative AI (Gen AI)
Visa | November 09, 2023
Artificial Intelligence

The evil twin sister: Gen AI’s use in fraud

  • Bad actors are using LLMs like FraudGPT and WormGPT to generate personalized phishing emails and malicious code.
  • It's not only FraudGPT and WormGPT that pose risks; regular and publicly available LLMs like ChatGPT and Bard play a role too.
Rabab Ahsan | November 02, 2023
Artificial Intelligence

Is Generative AI successfully making inroads into the banking industry?

  • Do Generative AI tools have the power to propel banks into a new era of personalization and efficiency? 
  • Dive into how banks are utilizing the power of Gen AI, what if anything is holding them up and whether technology providers have a head start in the space.
Rabab Ahsan | September 13, 2023
Artificial Intelligence

53% of consumers trust Generative AI for financial planning

  • Customers are showing willingness to purchase products recommended by Generative AI as well as trust its use for financial planning.
  • Even though customer appetite seems to be strong, FIs are not rushing into Generative AI adoption, especially in consumer-facing products.
Rabab Ahsan | June 22, 2023
More Articles