Wealth management is a $30 trillion industry in which the vast majority of “experts” charge 1-2% in fees annually. Despite this charge, on average they perform worse than the overall market. In fact a recent study suggests that nearly 90% regularly fail to beat the overall market.
It is an industry ripe for disruption, and this disruption is coming in the form of “robo-advisors,” online firms that charge less than 1% in fees, deliver software-based investment options, operate transparent model portfolios, and provide the mass affluent with the chance to make better equity returns year in and year out. Robos don’t aim to beat the market; they aim to deliver returns very close to the market, thereby beating most discretionary managers along the way. This may seem fractional, but given the scale, over the next decade this will deliver economic benefit to consumers that will total hundreds of billions of dollars.
Yet our thesis is that while the robo-advisory segment will absolutely disrupt the industry, robo-advisors themselves will not actually be disruptive.
The segment will disrupt the industry because robo-advisors will force a number of incumbents to react and offer discounted, transparent, competing offerings under their own or different brands. This is already happening in the US, with the likes of Vanguard offering Personal Advisor Services and Schwab’s Intelligent Portfolios. More will undoubtedly follow.
Wealth managers will zealously guard their industry. Unlike the era when Amazon came of age, transforming the book trade, wealth managers have too much cash, and too much at stake, to allow themselves to be “Amazoned.” Fidelity is not Barnes and Noble.
That said, we don’t see robo-advisors becoming “the next Schwab,” certainly not in Europe. Our view is that most European robo-advisors will be acquired by incumbents that are eager to jump-start their software-driven investment advisory offerings. Incumbents will find it easier to buy a robo than try to create one internally and face the classic “innovator’s dilemma.” Already in the US, LearnVest has been acquired by Northwestern Mutual and FutureAdvisor sold to Blackrock. In Europe, we have only seen financings so far for the likes of Nutmeg, moneyfarm, Vaamo, Liqid and Yomoni, but momentum will build.
What can European robo-advisors do to maximize their strategic M&A value over the next 2-3 years?
Position themselves as a credible manager for the lower end of mass affluent, not a lower-cost advisor for millennials. The industry is driven by trust, and millennials have no money. The underserved market are mid-career professionals with €100-200k of investable assets; the lower end of “mass affluent.” Focusing on that group positions a robo-advisor as a customer acquisition engine for customers larger firms may care about.
Develop a strong direct marketing channel to consumers. While more expensive, a direct marketing effort to consumers, rather than indirect partnerships, will create far more strategic value. A number of robo-advisors view a B2B business (marketing through another party), as a cheaper way to extend their market reach. We think it will be far too slow a route to achieve meaningful scale. We view B2B as a complement to a core B2C business, not as a valuable main focus for any robo-advisor.
Demonstrating much lower customer acquisition cost (CAC) is essential. Traditional managers can pay up to €600 to acquire a customer. For a robo-advisor with a lifetime customer value of perhaps €750-1,500 over a decade’s worth of management, CAC must literally be a fraction of a traditional manager. Otherwise, where’s the value of the acquisition engine?
Fundraising is a strategic asset. It will take €20-50m+ to scale a robo-advisor to assets under management of €1BN+, still small in market terms, but demonstrating they are a serious player. The stock market is strong and capital can only be raised in a strong market. Raising all the necessary capital as quickly as possible gives a robo-advisor the feel of a “winner” even when the market turns down.
2-country presence increases strategic value. Robo-advisors that prove success in two markets will get a European platform value, inevitably higher than a country platform value.
Demonstrate ability to scale to €1B+ AUM. In a 2-3 year period, it is unlikely many, if any, European robo-advisors will amass the €5B+ AUM needed for a long-term profitable wealth management firm. Therefore robo-advisors will be valued based on potential more than reality. Demonstrating the trajectory to get to €1BN+ is likely to convince traditional buyers that a robo-advisor has real traction, and can add AUM as well as being a customer acquisition machine.
Posted by Victor Basta @MaExits