FT Partners Archives

Investment Banker Steve McLaughlin left Goldman Sachs in 2002 to start FT Partners, a boutique investment bank focused on fintech. 2002 — that was definitely before fintech was cool and since then, Steve has played a major role in the growth of the industry. Now, 15 years in and with a team of 70 people, Steve and FT Partners have completed hundreds of transactions in the fintech space.

I sat down with Steve to talk about how fintech has changed over his career, how the industry grew to become cool, and how the interactions between incumbent financial institutions and fintech startups should continue to play out.

Steve’s firm just published a massive research paper on digital wealth management. He’s participated in many of the big fundraisings and transactions in the roboadvisor space, so I was interested to learn about how he sees this industry evolving and whether he expects to see standalone roboadvisors with big businesses a few years down the line or whether digital wealth management is more like a bolt-on feature for generalist asset managers.

Below are lightly edited and condensed highlights from the conversation.

Standalone roboadvisors?

I think for a long time, there’s always room for standalone roboadvisors that go direct to consumer with a slick product. But, I think the BlackRock/FutureAdvisor deal shows that the empire will strike back and arm pretty much every RIA in the country with these types of products and services to service their clients.

Fintech specialization

Investment banking for fintech absolutely requires a specialization. That’s one of the reasons we’ve done as well as we have: there still isn’t a single firm that’s 100% focused on fintech like we are. Top fintech firms that work with larger investment banks typically get a top technology or software banker working with them. Given our experience in the fintech space, when we get hired by clients, we almost instantaneously know what they do, how they do it, who the buyers and investors are in the space. Our completion rate on transactions is 90% — that’s because we can also pick the highest-quality clients, as well.

How fintech has changed

In the pre dotcom-bust era, you had a ton of innovation but the problem was that 1% of people weren’t comfortable with ecommerce, there weren’t smartphones, and encryption wasn’t what it is today, and the models required 5-10X the capital to get off the ground. Many of these companies failed but you did have some successes like PayPal, Checkfree, ING Direct and Capital One.

Between 2002 and 2008, there weren’t too many earth shattering things going on. The big area of innovation then was in the brokerage technology space. You had the New York Stock Exchange moved from guys flashing hand signals around to get trades done to getting wiped-out and becoming fully electronic.

Post financial crisis, we’re in a completely new area of innovation. Millennials have grown up using smartphones, the Internet of Things, and Big Data is changing the world in a much more rapid pace. I don’t think anything is going to change dramatically over night. There will be some companies that create multi-billion dollar businesses but companies of that size won’t change financial services very broadly. We don’t predict the fall of JP Morgan or Wells Fargo any time soon and there will be lots of time for the big guys to catch up.

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.

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

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

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

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[podcast] Top banker Steve McLaughlin on the future of wealth management