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

Is there really a wave of fintech M&A coming?

is there a wave of fintech M&A on its way?

Could we be looking at a wave of M&A in the coming years?

There are many reasons to believe the answer to that question could be “yes.” Keeping up with a changing global financial landscape since the turn of the millennium has proved to be a challenge for many global financial institutions, many of whom still operate on cumbersome legacy technologies. At the same time, energetic, imaginative startups have re-written the global rules of communication and finance, with mobile and internet companies now offering a host of low-cost, convenient alternatives for payments, investing, and automated money management platforms.

The large incumbents in the finance industry certainly aren’t planning to leave the playing field and hand over the finance sector to the startup and internet world. Banks are some of the biggest consumers of technology – they spent $486 billion in 2015, 18% of worldwide IT spending. And some analysts predict that the global banking industry will grow to $163 trillion in assets by 2017, with a 5 year CAGR of 8%.

In addition, according to a white paper released in March by UK firm FirstCapital, 92% of bank executives understand that their systems and processes must be upgraded to comply with constant regulatory change. Leaner, meaner newcomers have challenged retail banks with enhanced user experiences, competitive rates and a consumer centric approach.

But, the same research estimated that new technologies and fintech startups stand to siphon $4.7 trillion in assets away from today’s largest finance companies. Venture capitalists are betting on a disruption of the finance industry, upping their investments in fintech companies over the past six years, from $366 million in the first quarter of 2010 to more than $4.845 billion in the third quarter of 2015.

All of which raises a host of questions. Can large banking and financial institutions adapt to the new millennium? Can an industry that has long been dominated by MBA professionals adapt to a world of roboadvisors, one where professional-quality technology is available to non-industry players, often in their teens or early 20s, with professional levels of competence, and a global exposure via social media?

And what about traditional banks, long accustomed to financing new cars, vacations or new businesses but who have suddenly been challenged by crowdsourcing and peer-to-peer lending platforms, or by non-bank money transfer platforms used by tens of millions of people in Africa that have no other access to banking and financial services.

In many ways, the answer is clear: The finance industry is adapting to a new reality, if reluctantly. For example, look at how the mutual fund industry is responding. Many asset managers and investors have switched their focus from expensive, actively managed mutual funds to cheaper exchange-traded (ETF) and index funds, to the tune of about $250 billion in 2015 alone. That’s a boon for investors, who enjoy lower fees. But for asset managers, the new reality is an ugly one that cuts directly into their revenue.

“ETFs have $2.1 trillion in assets, with an asset-weighted average fee of 0.27 percent, producing annual revenues of about $5.5 billion,” Bloomberg reported on April 7. Traditional index funds have 2.1 trillion in assets but have an asset-weighted fee of just 0.10 percent, producing $2.2 billion in annual revenue,” Bloomberg says. Those same assets would have generated over $30 billion in fees if they had been managed in actively-managed mutual funds — that’s $27 billion of revenue that’s just evaporated from the industry.

In addition, FirstCapital says that the largest US banks have made “strategic investments” in over 30 fintech companies. Some incumbents such as BBVA, HSBC and Sberbank CIB have launched dedicated fintech funds topping $100 million to be invested in early stage technology firms. Others, like BBVA, have acquired online challengers. Industry majors IBM, Microsoft, HP and Thomson Reuters have upped their games to service financial clients, investing heavily in enabling technologies, including fraud prevention and risk management software, infrastructure management for banks, data security and more.

To meet the challenge posed by disruptive startups and technologies, FirstCapital predicts a wave of mergers and acquisitions over the next three years as “financial incumbents [will] look to catch up with widespread innovation from new entrants… We expect a wave of M&A activity in the next 3 years as financial incumbents look to catch up with widespread innovation from new entrants, the internet majors scale up in financial services and the technology/software majors add new technology to deepen their offerings in this sector.”

In addition, the white paper expects “the internet majors scale up in financial services and the technology/software majors add new technology to deepen their offerings in this sector, particularly via the use of blockchain technology for payments, regulatory reporting and share trading.

Could be. Last August, asset manager BlackRock acquired automated investment advisor, FutureAdvisor, and is already rolling it out to financial advisors who work for the firm. Spanish bank, BBVA has purchased two challenger banks. It is certainly not inconceivable that major industry institutions could move to acquire upstarts into their basket of services in the coming years.

But that is far from certain. The incumbents’ sheer scale gives them the luxury of being patient and the ability to weather the challenges posed by newcomers calmly and carefully. At the institutional level, banks and lenders are already testing blockchain technology developed in-house and with he help of service providers. And Goldman Sachs still employs more engineers than Facebook. This could indicate that the traditional industry leaders are biding their time not until it is the right time to go on a buying spree, but rather until they have analyzed the industry, mapped out the future and they are ready to roll out their own, in-house technologies on their own terms.

Photo credit: pmarkham via / CC BY-SA

Update: Fintech M&A, circa 2013

fintech M&A 2013

From Berkery Noyes, an independent iBank with some great industry data, comes an update on mergers and acquisition activity in the fintech space.


  • Total transaction volume in Q3 2013 increased by 21 percent over Q2 2013, from 77 to 93.
  • Total transaction value in Q3 2013 rose by 55 percent over Q2 2013, from $5.5 billion to $8.5 billion.


  • Davis + Henderson’s acquisition of Harland Financial Solutions, a provider of software and services to fi nancial institutions, was the largest transaction in Q3 2013, with an acquisition price of $1.6 billion.
  • The industry’s most active acquirer year-to-date was Thomson Reuters with nine transactions. Five of these occurred in Q3 2013: BondDesk Group LLC, Bisk CPE and CPA Test Prep Division from Bisk Education, Inc., Omnesys Technologies, SigmaGen

For more transactional information on fintech, check out MandASoft

Predict the next M&A – with Arye Schreiber

M&A crowdsourcing

By most account, the M&A process is fundamentally flawed.

Incentives aren’t aligned — from advisors to bankers to CEOs. All want more M&A, not more successful deals.

This week’s guest on Tradestreaming has created a crowdsourced model for investors to help predict the next successful merger and acquisition. Arye Schreiber, founder of Merjerz,  has created what he feels is a better model to align incentives, encouraging fundamentally more successful M&A activity.

And investors can be first to know.

Listen to the FULL episode

About Arye Schreiber

Arye is the founder of Merjerz. His previous experience has been in corporate law, advising multinational companies on M&A.

Continue reading “Predict the next M&A – with Arye Schreiber”

Making sense of the Google, Motorola Deal – with Dan Hoffman

M&A crowdsourcing

We’re doing something a little different with this interview.In the wake of the announcement that Google ($GOOG) was buying Motorola Mobility ($MMI), I wanted to understand the deal dynamics better.

I spoke with Dan Hoffman, CEO and President of M5, a managed VOIP solutions provider.Dan’s an Internet pioneer, founding an early ISP. M5 services enterprise clients with cloud telephony, on the forefront of telecommunications service.

In this interview, we address

Join us today: A live chat about global value investing — Prince Waleed Style [Tradestreaming Live]

by Jeff Towson

Many of you mentioned that you enjoyed our recent interview with Jeff Towson, best-selling author of What Would Ben Graham Do Now: A New Value Investing Playbook for a Global Age.  Towson spent 9 years closely working with Saudi Prince Waleed, one of the world’s richest and most successful investors.

Towson provides a global value investing framework for Westerners interested in getting involved abroad.  The thing is — after the interview — many of you still had questions.  Towson wrote a book intended for investors of all size, but many felt that his framework was more attuned to private equity investors — professionals with deep pockets.

I’ve invited Jeff to talk more about his book, his experiences working under Waleed, and his view on global investing in a new live format on Tradestreaming, I’m calling — for lack of a better term — Tradestreaming Live. Think of it as an intimate chat about global investing. Continue reading “Join us today: A live chat about global value investing — Prince Waleed Style [Tradestreaming Live]”

Best way to trade the rumors? Bloomberg (and Tradestream) says short ’em

To a philosopher, all news as it is called, is gossip, and they who edit and read it are old women over their tea — Henry David Thoreau

Gossip is called gossip because it’s not always the truth — Justin Timberlake

With stocks, there is so much noise and pumping going on that investors can feel like they’re at a Motley Crue concert again.  So, how do investors using smart strategies and historical data profit from rumors?

Bloomberg is out with proprietary data today that suggests shorting stocks caught up in merger rumors is a viable, profitable strategy.

Electronic news services, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies between 2005 and 2010, according to data compiled by Bloomberg. A total of 104, or 14.5 percent, were acquired, the data show. While stocks that were the subject of takeover speculation initially jumped 2.9 percent, betting on declines yielded average profits of 1.2 percent in the next month, an annualized gain of 14 percent.

In Tradestream, I devote an entire chapter, Grind the Rumor Mill, to rumor mongering and how that plays out for investments – essentially short-selling a basket of M&A rumors.  This strategy works because while real acquisition targets see above-average appreciation, most rumored M&As don’t actually come to fruition.

I included a rumor model developed by Nudge’s Cass Sunstein that he used in his recent book, On Rumors: How Falsehoods Spread, Why We Believe Them, What Can Be Done (affiliate link).  This included identifying propagators, qualifying their prior beliefs, and predicting the cascading effect from any change/reinforcement of those priors.

Much of the guts and data behind this strategy was documented by Gao and Oler in “Rumors and Pre-Announcement Trading: Why Sell Target Stocks Before Acquisition Announcements?” (June 2008)


The Strategy

  • Research: Scan the WSJ’s Heard on the Street for reported, but unsubstantiated merger and acquisition rumors
  • Adjust for market cap: The strategy works better when you remove companies with market cap >$20B
  • Short basket trade: Short sell a basket of these rumored targets and hold for 70 days after the rumor first appeared.  Cover.  Hedge if you like.
  • Timing best for hot M&A years: if M&A heats up (like now, right), the data show the strategy works even better

Last thing

The Bloomberg research found that this short-the-rumor strategy worked (+14%) even when it coincided with other contradictory bullish signals like call buying.

Call volume in New York-based Jefferies Group Inc. jumped amid unconfirmed takeover reports on Feb. 27, 2008. Calls on the company changed hands 12,692 times that day, 24 times the four- week average and the most in almost a year, and the shares gained 3.7 percent. A deal never occurred and Jefferies dropped 3.4 percent the next day, 10 percent the next week and 20 percent in 30 days. The S&P 500 lost 4.7 percent in a month.

Caveat emptor: I have not actually used this strategy in portfolios (I’m pretty much long only) and I think it would take balls of steel to really stick to it.

Further Reading on Investing and Rumors:

Can you trade on rumors? One possible model

In Tradestream, I spent a whole chapter looking under the covers of investing/trading strategies that focus on rumors.  Greater sentiment analysis (like the hubbub that erupted after Prof. Bollen published a paper on using twitter to predict stock market swings) is in early days but at its core is a desire to use news/chatter to better gauge future stock moves.  Bold and audacious, but not nearly there yet.

Rumors: A Model

In the book, I developed a model upon the one Cass Sunstein (co-author of Nudge and just a prolific writer/thinker) used in his most recent book, On Rumors: How Falsehoods Spread, Why we Believe Them, What Can Be Done.

Rumor transmission often involved the rational processing of information, in a way that leads people quite sensibly in light of their existing knowledge, to believe and spread falsehoods.  This problem is especially acute on the Internet — Cass Sunstein, “She Said What?  He Did That? Believing False Rumors,” Harvard Law School Public Law Working Paper No. 08-56 (November 2008), 2

Sunstein describes a useful framework with which to understand how rumors get started and how they get propagated — influencing decision making.

Sunstein describes the various actors in the social transmission of false information.  While he focuses on rumormongering, I try to apply this framework to investing.

  1. Propagators:
    1. self-interested, varying degrees: they may own a stock and work to discredit those who don’t like it or are short
    2. altruistic: sincerely interested in promoting some type of cause — these guys don’t even realize that they are spreading falsehoods
  2. Priors: success or failure of rumors depends on how closely they approximate the prior beliefs of those who hear them
    1. motivations: people don’t enjoy hearing bad things about ideas/people close to them and conversely, they are more open to receiving false info about something they dislike
    2. beliefs: Sunstein says that people who have strong prior beliefs usually do so because of what they know and therefore, require a lot of supporting information to upseat those beliefs
  3. Cascades: the mechanisms of rumor transmission, why/how/when people accept/reject a rumor is intimately connected to how the information affects their personal desires
    1. informational: groups of investors are led to accept a thesis in spite of individuals’ private info.  Think of all the hating that goes on on Yahoo Message Boards.
    2. reputational: people can be led to believe things in conflict with their priors but do so to curry favor with others.  This is equivalent to a fund manager on CNBC pumping his portfolio — as an expert — his status and street cred influence others’ beliefs (whether correct or not)

So, we have to narrow our focus down to why stocks move they way they do when unsubstantiated news — rumors — are floated.

Rumors and Preannouncement Trading

I chose to focus on rumors surrounding M&A announcements.  Many times, the Wall Street Journal will publish stories on unsubstantiated mergers and acquisitions.  Target stocks will jump and acquirer stocks drop.  That said, though, many of these rumored M&As fail to consummate.

“While sellers lose money when a rumor precedes an actual announcement, in most cases rumors fail to materialize into public announcements.” Rumors and Pre-Announcement Trading: Why Sell Target Stocks Before Acquisition Announcements?” (Gao, Oler)

Given the research of Gao and Oler:

On average, stock prices of rumored firms drift down to their pre-rumor level over a 70-day period after the initial price jump when a rumor is published and that only 12% of rumored takeovers materialize into actual announcements within 70 days.

So, really, Tradestreaming would be all about finding the right side of this strategy — where the numbers, data and probability is with the investor.  That would mean taking the other side of the trade.

The Antitakeover Strategy

  1. Research WSJ for reported but unsubstantiated M&A
  2. Remove all mega cap firms (<$20B)
  3. Short a basket of rumored acquisition targets and hold 70 days after the rumor first appeared.  You can hedge by going long the market if you like.
  4. Strategy performs even better during periods of increased M&A activity


The researchers found that this strategy would put up 4.2% in abnormal returns — when you further restrict the strategy to hot M&A years, profits go up to 12.7%.