Why robo-advisers are looking to former magazine editors for the human touch

Robo-advisers Wealthsimple and Ellevest believe in the human touch after all.

Both have plucked editors from top publications in order to personalize the often-dry world of investment advice by focusing on lifestyle matters. Ellevest hired chief design officer Melissa Cullens, who was an independent design strategist that Vogue.com recruited to lead the re-design of its website. Canada-based Wealthsimple, which expanded to the U.S. last week, hired Devin Friedman, a former GQ editorial director, as brand editor to lead its section that features interviews with people about the role money has played in their lives.

“The human side is something I don’t think a lot of people in our space have done a great job of, and it’s one where we excel,” said Wealthsimple chief product officer Rudy Adler. “It’s easier to do when you have a great voice; you’re coming at them with humor and not boring them with dull finance articles. We’re trying to find an emotional way in.”

At Ellevest, the investment platform for women launched by Wall Street vet Sallie Krawcheck, Cullens focused on the role money plays in helping people feel safe and express their values, like having control over their lives. That thinking was expressed in the design of the platform but also the user experience, including how many steps users have to take in the on-boarding process, what information they hand over and what the form field experience is like.

For example, similar services often ask questions about a user’s investment experience and risk preferences, and they’re usually laden with jargon and can take at least 10 minutes. Cullens designed the Ellevest on-boarding experience to include the client’s life goals, not just financial goals, and streamlined the process.

“We wanted to try to create an interface and experience that gave her the reins she was already taking and make investing work for her instead of making her learn more, work harder or be better to fit into the mold of a system that ultimately has excluded women,” Cullens said.

Robo-advisers, which dole out artificial intelligence-driven investment advice through a website or app, have been one of the fastest-growing parts of the U.S. fintech market. But that growth has leveled off as banks and other traditional financial institutions have piled into the space, creating new competition for customers.

Traditional financial services have mostly targeted high-net-worth individuals. But fintech depends on being able to relate to young people who are new to investing and may have lived through the last recession and distrust traditional finance. That’s where people with luxury brand experience can help robo-advisers differentiate.

“In the early days, no one thought about client experience; they just thought that if you log in, then you can make a transfer,” said April Rudin, chief executive of wealth management marketing firm The Rudin Group. “By bringing talent that has experience in creating a luxury experience, the idea is [fintechs] will take their functionality and give it client experience.”

Roboadvisors and the DoL rule: No more guessing

When the DoL fiduciary rule passed, many feared that small retirement accounts will be orphaned because the changing fee structure will make them unattractive to advisors.

In response, others claimed that automated advice, or roboadvisors, should be able to swiftly, cheaply and compliantly sweep those accounts up. However, many top level officials, executives and legal experts have debated whether software-based, automated advice can truly client’s personal situation into account when issuing advice and conducting proper due diligence.  Such solutions lend themselves to a one-size fits many model, experts say, and might not qualify as having the clients best interest.

The DoL just issued its first FAQ, clarifying its position on the subject. The bottom line: roboadvisors that can act as level fee fiduciaries are OK.

“There is a clear and substantial conflict of interest when an adviser recommends that a participant roll retirement savings out of a plan into a fee-based account that will generate ongoing fees for the adviser that it would not otherwise receive, even if the fees going-forward do not vary with the assets recommended or invested,” the DoL wrote in its FAQ. “The streamlined level fee provisions of the BIC Exemption cover roboadvice providers engaging in these discrete transactions.”

The rationale for this exception is that charging a level fee eliminates any conflict of interest that arises from the traditional commission-based compensation structure.

Level fee fiduciaries must still comply with the impartial conduct standards, which require fiduciaries to act in the best interest of their clients, charge no more than reasonable compensation, and make no misleading statements.

This puts some robos in hot water, particularly those that are, in effect, distribution channels for proprietary products.

The classic, plain vanilla, roboadvisors, like Betterment and Wealthfront, should feel pretty comfortable under the level fee exception. Incumbent-run digital portfolio managers, which tend to overemphasize their own financial products, might have a hard time complying with the impartial conduct standards.

For example, though Schwab Intelligent Portfolio charges investors a level fee of $0, it does charge investors different fees for different products offered by automated advice.  Under this scenario, there is a clear incentive to offer certain products and not others. This is exactly the type of conflict of interest the DoL sought to eliminate.

Are robots the answer to DoL rule challenges? Maybe, maybe not.

automation technologies

The U.S. retirement income industry is a complex beast with income derived from many sources, like Social Security, traditional pensions, 401(k)s, and Individual Retirement Accounts.

Managing an IRA can be a hard task for individuals, as they involve many possible products. This leads people to seek professional advice. With commission-based compensation and complex fees, conflicts of interest are commonplace.

A report by the The Council of Economic Advisers estimated that the annual cost of conflicted advice is about $17 billion each year, with $1.7 trillion of IRA assets invested in products with conflicts of interest.

It is on this backdrop that the DoL released a new set of rules requiring anyone providing investment advice to retirement plans to do so under fiduciary requirements to be prudent and avoid conflict of interest. The industry is now scrambling to change products, workflows and fee structures to comply with the new rules before the effective date of April 10, 2017.

With compliance costs high, many advisors are exiting the business. Other are restructuring their compensation structure. Cambridge Investment Research, an independent broker dealer, estimates that it will spend $15 million to $17 million on technology upgrades and other operational changes in anticipation of the rule.

With higher compliance costs, some are looking to cheaper options, like roboadvisors, to offer scalable solutions.

“Since roboadvisors charge a flat fee, many believe that they will comply with the DOL fiduciary rule without the need to justify fees or show that there is no conflict of interest under the Best Interest Contract Exemption,” wrote Bates Research Groups. Technology firm, CGI suggested roboadvisors will be used to service accounts that otherwise would be deemed not profitable enough and might be orphaned.

However, the question whether roboadvisors themselves can themselves be considered fiduciary is debatable.

Earlier this year the Massachusetts Securities Division issued a policy statement that examined roboadvisor compliance with their fiduciary responsibility. The policy statement questioned software’s ability to take a client’s personal situation into account when issuing advice and conducting proper due diligence.

“The commoditization of advice and streamlining of solutions, based on few broad initial survey questions, lends itself to ‘one-size-fits-many’ portfolios that may not be suitable for each client,” commented Min Zhang, CEO of Totum Wealth, a provider of technology solutions to advisors. The way roboadvisors are structured, she added, lures clients into a potential false sense of confidence that something truly unique is being created for them.

Blaine Aikin, executive chairman at fi360, which offers fiduciary education, certifications, software and practice management offerings, echoed Zhang’s sentiment. Roboadvisors do a good job for people with simple and well-defined goals, he said. Problems arise when cases become more complex, though. Roboadvisors currently do not really personalize their offerings, which might be a breach of due care responsibility.

In addition, algorithms might have systemic biases, which might prevent them from offering advice that is truly in the best interest of their clients.

Both Zhang and Aikin agree technology and roboadvisors will play an increasing role in the future of wealth management, but envision more of a hybrid model, where robos support humans to make better decisions, but the humans have their hands on the wheel.

There is no overarching regulation regarding roboadvisors. FINRA, the SEC and the DoL are dealing with aspects of automated investments advice. It is mostly up to advisors to figure out how to comply with the ever-changing regulatory landscape.

Hi Five! The five fintech stories we’re following this week

5 trends we're tracking in finance

Venmo, behind you: incumbents are taking on P2P startups

It was only a matter of time, really. Though peer-to-peer payments have primarily been the focus of fintech startups, incumbents are delving into this market via clearXchange, a white label P2P payment platform for financial institutions.

Instead of developing a P2P payment product in-house, 5 of America’s top banks (including Chase and Bank of America) have signed up to the clearXchange network. So far, customers can only send money to other of the bank’s customers via the platform, but eventually they’ll be able to send to family and friends who bank elsewhere.

Chase’s Jamie Dimon famously said that he expects to win at payments; Chase’s integration of clearXchange into its existing banking apps is one indication of just how they’re planning to do that.

Turning non-customers into customers with mobile apps

It’s tough to market a bank – especially when so many millennials have lost faith in financial institutions. A new marketing tack that banks are testing out is a line of mobile services aimed at non-customers. The idea is that these mobile apps will cultivate more frequent, deeper engagements with non-customers, which will eventually lead to converting them into customers.

Whether this mastermind marketing plan will yield the desired results remains to be seen. In the meantime, ZEO, TCF Bank’s suite of services offered to all humans (customers and non), has been a big hit with existing customers – this in itself could entice more non-customers to the platform and to the bank itself.

Roboadvisors are a game changer, but at what cost?

This week, Betterment became the first independent roboadvisor to surpass $5 billion in assets under management. Well done, Betterment, but beware: this is also the week in which a report on the just how unprofitable roboadvisors are went live.

The report by UK asset manager Alan Miller was (wrongly, we think) largely ignored by the media, but its findings demonstrate that roboadvisors’ business models are extremely problematic: it can take up to 11 years for a roboadvisor account to become profitable, and a UK robo spends an estimated £2,794 over the life of an account.

This might not be a big deal for incumbents who have spun off or acquired a robo, but for smaller robo independents, these costs could be a long-term death sentence.

Regulation technology is coming into its own

Whether you’re an established incumbent or a hopeful startup, the double whammy of state and federal financial regulations can be overwhelming. Luckily, there’s tech for that: meet regulation tech (better known by its stage name, regtech).

Though it might not be the sexiest technology, regtech helps companies of all sizes from across the finance industry jump through flaming bureaucratic hoops, such as registration requirements, license fees, training requirements, and staffing rules. Tradestreaming’s Gidon Belmaker lays down the regulation challenges finance companies are facing and pinpoints the top 10 regtech companies that are steadily gaining momentum.

Globalization is speeding along multi currency solutions

Brexit aside, globalization has allowed more people than ever before to spend and shop in foreign currencies. This trend has obviously led to an increased demand for online and mobile money exchange solutions, and the UK fintech mavens haven’t disappointed:

Revolut, launched in 2013, is a multi currency payments platform that enables you to exchange, send, and spend your money while avoiding foreign banking fees without using a bank. The Revolut app, combined with a prepaid MasterCard, lets users load money from the bank account in their domestic currency and spend it in 90 different currencies across the globe – including bitcoin – at the interbank rate. Revolut just raised over $8 million from big-name investors and also has raised more than $11.7 million through pledges via a crowdfunding campaign.

Perhaps following a frustrating experience of returning from, say, London, with 20 pounds and nothing to do with them, WeSwap, a P2P platform, is touting cheaper travel money for all with its app that enables travelers to directly swap currencies with one another. The company is fresh off a $10 million funding round, and its CEO is confident that English fintech can prevail in spite of the Brexit referendum.

Photo credit: Loozrboy via Visual hunt / CC BY-SA

The evolution of the social trader

Social psychologists have argued that before humans developed language, mimicry was one of the main forms of communication humans had with one another. It is in a large part thanks to mimicry, they contend, that human beings were able to create harmonious relationships in the first place.

If that hypothesis is correct, fintech startups are returning to Communication 101 with social trading platforms. These platforms enable users to follow the real-time trading activities of other investors and to mimic these trades in their own portfolio without leaving the platform.

For a while, it seemed like this throwback to roughly 100,000 years ago just wasn’t radiating that cool retro vibe. 2014 saw the closure of three social trading platforms, and it’s unclear whether some of the existing platforms have been able to raise growth capital. 

Nevertheless, if there was a ever a time for copycat financial apps to take wing, it’s now. Millennials, who make up 25% of the US population (that’s around 80 million people), are highly social beings: 90% of them are on social media, and 42% of millennials on Facebook and 35% of millennials on Twitter use these platforms to share content – in other words, to mimic their friends.

Another encouraging marker for social trading platforms is the impact of social media on millennial decision-making processes: a 2014 study by Market Studies International found that millennials are three times more likely than any other generation to reference social media networks before making purchasing decisions. For millennials, peer review and input is a major component of brand trust, and happily for social trading platforms, these features are structured into the service.

Transparency is the new black

In fact, these platforms can take brand trust a step further with their approach to transparency, another value that millennials cherish: “Many people obtain their ideas from newsletters, friends, social media, forums and chat rooms,” says Juan Mendoza, founder and CEO of Peeptrade, a newly launched financial information platform with a social twist. “But none of these sources actually show if the authors are putting their money where their mouth is.”

For Mendoza, social trading platforms, when done right, use transparency to grow investor trust. By allowing users to see what other people are doing with their own money in real-time, “people not only exchange ideas but also share their actual portfolios, performance and risk metrics with other users.” The fact that they can verify the statements of other users by looking at their portfolio and trading activity means that social trading platforms like Peeptrade are facilitating a community of investors who are linked by trust. 

Peeptrade is just one of a number of social trading platforms making social a core priority. Some of the biggest names include ZuluTrade, etoro, and Ayondo, which are, interestingly, all based outside the US. However, individuals looking to invest socially can choose from at least 29 different social trading platforms. In theory, these platforms level the playing field and empower individuals to invest safely, wisely, and simply. Heck, as etoro’s CEO Yoni Assia told Tradestreaming, they might even find it enjoyable.

Millennials aren’t investing, peeple

Wall Street needs all the help it can get in securing millennial investors – a March 2016 Harris poll commissioned by investing app Stash showed that nearly 80% US millennials aren’t invested in the stock market. Part of the problem is that investing is sometimes baffling – 75% of the women surveyed found investing confusing, though millennial men weren’t far behind, with a considerable 60% bamboozled by investing.

Social trading platforms are positioned to fill the investing information gap when it comes to millennials. The platforms are more than their autotrade (mimicking) capabilities. Peeptrade, for example, provides a significant amount of free financial information for its users, including trending financial news, market sentiment, analysts ratings, charts, quotes, and fundamentals. The company also provides filters to determine which expert investors (or “Gurus”) on the platform they should follow.

“Conversations and interactions are an important part of the platform,” says Mendoza. If millennials find themselves struggling to comprehend basic investing principles, they can turn to the social trading community these platforms foster for help. Because platforms like Peeptrade have invested in transparency, millennial users can easily decide which experts on the platform should be listened to (and which are not worthy of the coveted title “Guru”).

Robos are not the enemy – or are they?

One stumbling block on the way to social trading’s growth would seem to be roboadvisors, those automated investment advisors. However, Peeptrade’s CEO  envisions a world in which roboadvisors and social trading platforms live in perfect harmony, largely because each one serves a different target population. “Roboadvisors are a great tool,” says Mendoza, “but our users are people that invest on their own, and we want to help them make more informed investment decisions and help them learn from other experienced traders.”

Nevertheless, from a trend perspective, it seems likely that roboadvisors will lure away some of these platforms’ millennial clients. Wealthy millennials are already allocating 90% of their equity portfolios to ETFs, as part of a phenomena that Morningstar has ominously dubbed “flowmaggedon.”

Though the mimicry may be strong with millennials, it may not be enough to woo them to social trading platforms; if their peers have chosen robos, they might choose to copy that trend instead, especially if social trading platforms can’t match robos’ attractive low rates.

Meanwhile, for the self-directed investor among the 20% of US millennials who are investing, platforms like Peeptrade are making active investing more relatable and accessible. 

Photo credit: alant79 via VisualHunt.com / CC BY

WTF are social trading networks?


In the summer of 2015, Pinterest and Instagram introduced click-to-buy features to augment mobile sales. The move towards click-to-buy on these platforms seemed promising: brands and celebrities have hundreds of millions of followers on Pinterest and Instagram, and buy buttons would enable passive followers to become active shoppers in nanoseconds.

Nevertheless, these buy buttons haven’t really taken off, for a number of reasons: in the plethora of content on the web, individual pieces of clothing get lost, and, frankly, consumers aren’t really interested in using Pinterest and Instagram as purchasing channels.

The fashion industry might have known that getting people to actually make purchases with buy buttons was going to be tricky if they had looked to the world of finance. Fintech entrepreneurs have been trying to harness social technology for sales for years with social trading networks.

What are social trading networks?

Social trading networks are online platforms that enable members to follow the trading activities of other investors, including well-known professionals. Most of these platforms have autotrading capabilities, which means that investors can choose to automatically copy other traders’ moves from the platform itself in their brokerage accounts.

While the average person can figure out which brands to follow online based on his or her particular taste in clothing, the beginner or even veteran investor may have trouble identifying the traders worth following. Social trading networks help members tell the wheat from the chaff by providing completely transparent user statistics and history. These networks have taken the social aspect of their name seriously by taking their cue from Google+ (not a great sign, guys) and enabling members to trade in groups.

Sounds groovy. So what’s the problem?

Any concerns that brands had when launching buy buttons on Pinterest or Instagram could be soothed by the knowledge that all Pinterest and Instagram users wear clothing – there was always a certain chance that these users would be interested in buying their wares.

However, the audience that social trading networks is appealing to is much more niche – not simply investors or potential investors, but active investors. This pool is slowly evaporating, with increasing numbers of investors turning to roboadvisors, the new gods of statistics and analysis, to do their investing for them. With studies showing that passive investments are cheaper and perform better, it’s hard to blame them.

Moreover, social trading networks have a much bigger marketing challenge than brands on Pinterest and Instagram — people use these platforms for personal consumption, whereas social trading platforms need to convince investors to sign up in the first place.

Another problem is the assumption underlying social trading networks; i.e., that a trader that has invested well so far will know how to invest in the future. That’s a little bit like saying that a scholar of the first World War could have accurately predicted the second. Possible, but not probable.

That does sound problematic. Why would I join one of these networks?

If you do want to be an active investor, social trading networks have their perks: they make it simple to interact with like-minded traders, to gain access to trading statistics and analysis, and to adjust your portfolio to mirror that of your trading mentors.

If you happen to be a brilliant trader, you can also get paid to share your investment activities on these platforms.

Ok, I’m intrigued. Who are the major players?

Social Trading Guru lists 29 leading social trading networks. Most of the assets classes traded on these networks are forex, though some are stocks, indices, and commodities. In case the problems cited above gave you the indication that social trading networks are a digital disaster, the situation is not so dour: Israel-based etoro has raised $79M, while German-based ayondo has raised $10M.

Still, like their fashion compatriots, a lot of social trading networks seem to be struggling to monetize social technology.

Put it this way: social trading networks are the buy buttons of the finance industry. They might see higher usage rates in the future, but for now, they’re mostly a sideshow, not a main investing act.

5 trends we’re watching this week

5 trends in finance this week

[alert type=yellow ]Every week at Tradestreaming, we’re tracking and analyzing the top trends impacting the finance industry. The following is a list of important things going on we think are worth paying attention to. For more in depth trendfollowing, subscribe to Tradestreaming’s newsletters .[/alert]

  1. Oscar Health raises $400m, said to be valued at $2.7b in Fidelity-led round (Bloomberg)
    Health insurance startup, Oscar Health was valued at $2.7 billion in the startup’s latest round of funding, according to a person familiar with the matter. That’s about $1 billion more than when the health insurer raised funds in September. In the latest round, the company said it took in $400 million from backers led by Fidelity Investments.
  2. Oops, Vanguard sent 71 account emails to wrong investor (TheStreet)
    The tweet by a Vanguard Group customer went out on the morning of Feb. 11.
    “Just got 77 e-mails from @Vanguard_Group detailing how much money people withdrew from their accounts along with names,” he wrote. “Yay security.”
    With the rising sophistication in hackers targeting global financial systems, it’s kind of disappointing to see such an established player like Vanguard making such rookie mistakes.
  3. Should roboadvisors be regulated like investment companies? (Michael Kitces)
    Ultimately, then, the question of whether robo-advisors are in violation of Rule 3a-4 really highlights a broader question of whether any investment adviser that heavily leverages technology to standardize their investment process is coming too dangerously close to mimicking an investment company.
  4. How Curve is changing the nature of physical credit cards (Tradestreaming)
    The way we use credit cards is changing and many of the solutions, like UK-based Curve, are hardware/software hybrids. But much of the technology-enabled change doesn’t require major changes from a user’s point of view.
  5. Jon Steinberg launches ‘CNBC for Millennials’, Cheddar (Business Insider)
    Jon Steinberg, former president of BuzzFeed and CEO of Daily Mail US, is launching a startup called Cheddar. Steinberg is focused on attracting a smaller, savvier audience — business-minded millennials. Cheddar will stream one to two hours of live content every day, primarily from the NYSE trading floor, and distribute them across the web on platforms like YouTube.

The Startups: Who’s shaking things up (Week ending January 31, 2016)

fintech startups shaking things up

[alert type=yellow ]Every week, Tradestreaming highlights startups in the news, making things happen. The following is just part of this week’s news roundup. You can get these updates delivered direct to your inbox by signing up for the Tradestreaming newsletter.[/alert]

Startups raising/Investors investing

Is VC the right money for fintech? (TechCrunch)

Citi Ventures invests in working capital marketplace, C2FO (Finextra)

College Ave Student Loans scores $20m (PE Hub)

Blockchain Capital raises $13m for second fund (CoinDesk)

Leftover currency converter TravelersBox raises $10m (Reuters)

Social investing startup SprinkleBit raises $10m (TechCrunch)

Dopay, payroll company for the unbanked, raises $2.5m (PE Hub)

MIT spinout Insurify raises $2m to replace insurance agents with robots (TechCrunch)

The Startups: Who’s shaking things up

NYT: How roboadvisers stack up against each other (NY Times)

How Robinhood became the first financial app to receive an Apple Design Award (Let’s Talk Payments)

Robo-advisor Betterment launches business platform (Finextra)
Betterment, the largest automated investing service, is launching Betterment for Business. This comes the same week as President Obama is expected to introduce a budget plan making it easier for small businesses to form retirement plans for their workers.

Broken TransferWise all “smoke and mirrors”? (The Memo)

Moven partners with loan refinancers, Payoff and CommonBond (Bank Innovation)

Spare change investment platform, Acorns launches education site (Bank Innovation)

Tencent’s WeChat Wallet lands in Hong Kong, beating Apple Pay to market for mobile payments (South China Morning Post)

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?

Peter Nesvold, Managing Director, Silver Land Advisors
Peter Nesvold, Managing Director, Silver Land Advisors

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?

roboadvisors jump the sharkUsing 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.

Roboadvisors and ETFs: Product with built-in distribution channel?

ETFs and Robo-advisors

Respondents to EY’s latest yearly survey (pdf link) of the global exchange-traded funds (ETFs) and products sector think highly of the tie-in with automated investment advice platforms (roboadvisors).

On the distribution side, managers and promoters of ETFs recognize the need to invest in a dedicated salesforce to drive sales of the investment product. But there’s been a demonstrative surge in interest around digital distribution channels.

ETFs and digital distribution

According to the report’s authors:

Even so, there is a particularly strong sense that the digital dawn could be a “Eureka” moment for the retail take-up of ETFs. After all, the product and the technology share some common themes: low costs, transparency and breadth of choice. Of those surveyed, 90% view digital channels as an area of opportunity, and 89% expect robo-advisors to accelerate the growth of the industry.

Respondents see a powerful tie-in with traits jointly shared between roboadvisors and ETFs. It’s this overlap that’s concerning to some some experts in the industry who don’t see robos as a new manifestation at all. Rather, according to this viewpoint, it’s just an old financial product (ETFs) with a new distribution channel (roboadvisors).

According to Investment Advisor Magazine‘s Editor-at-Large, Bob Clark:

This suspicion was confirmed in a conversation I had the other day with Babara Roper, the Consumer Federation of America’s director of investor protection. In response to the criticisms of robos that I wrote about in the above mentioned blog (conflicting sources of revenues, self-dealing, and low standards of client care) she said: “Well, how’s that any different from the rest of the financial services industry?”

With the notable exception of independent RIAs, it isn’t any different. And that’s my point about robo “advisors.” They don’t represent a “new” entry into the financial services industry. They are merely a digital delivery system for the old financial services industry, rife with all of its conflicts and client abuses.

Owning the digital distribution channel is already top of mind at firms like BlackRock, the financial firm which owns the massive ETF provider, iShares. In August 2015, BlackRock announced it was purchasing FutureAdvisor, an aspiring roboadvisor that hadn’t quite reached the AUM of larger competitors, Wealthfront and Betterment.

While BlackRock has made it clear it has no plans to market to individual investors via its new roboadvisory offering, it certainly is planning to move its own iShares products through FutureAdvisor.

Instead the firm hopes to use FutureAdvisor to enable banks, brokerage firms, insurers and 401(k) plans to use the company’s digital platform to serve mass affluent investors and millennials, Frank Porcelli, head of BlackRock’s U.S. wealth advisory unit, said in an interview.

By pivoting FutureAdvisor into a B2B play to other financial institutions that market to the end investor, BlackRock will provide a built-in distribution channel to distribute iShares directly to clients of the wealth managers it services.

Schwab has had some very public early success with its Schwab Intelligent Portfolios (SIP) offering. Schwab just reported that its own competitive product to roboadvisors had grown AUM +37% quarter over quarter. SIP now boasts over $5B in AUM in just 2 quarters of operation. That means shortly Schwab’s AUM will approximate all the assets under management in the entire roboadvisor industry. Some of the criticism of Schwab’s Intelligent Portfolios has centered around the bias that the online broker has towards using its own ETFs.

Regardless of who emerges as the largest competitor in the digital advice space, ETFs are the ultimate winner.


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