Mergers, Bundles, or Bust: Where Do Roboadvisors Go From Here?
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Hi all, Julie here.
In 2015, I first started covering fintech by writing about the wealth management space (man, life was so simple back then). My first piece was on some of the consumer fintech apps focused on saving money, which were becoming more popular with millennials. After publishing the piece, Betterment reached out and asked if I wanted to stop by to learn more about them. At that time, a few of these startups were around and starting to gain some traction, and the likes of Charles Schwab, Fidelity and Vanguard were only casually looking and doing initial research. Today, the incumbents have now built a lot of their own versions of a roboadvisor in-house. It’s contrary to some other areas of finance—namely, retail banking—where banks have tried and failed to replicate fintech companies. Because these wealth management firms have been able to make their own versions, it’s eliminated what I thought was the path that most wealth management apps were destined towards: a potential acquisition by a firm that already has billions if not trillions under management.
The rumor mill has been swirling lately with the potential for Personal Capital to be acquired, but it sounds like some potential buyers are backing away (such as reports that JPMorgan isn’t interested). Deals that have gone through seem to be more around the infrastructure involved in wealth planning. Just last week, boutique wealth management custodian Folio sent a letter to customers saying that Goldman Sachs was acquiring them. And then of course, there was that massive deal that happened late last year when Schwab bought TD Ameritrade in December. What these deals all have in common is scale benefits, some of my industry friends pointed out:
“It’s radical consolidation in wealth management infrastructure, particularly custodians, but actually offering wealth management services is still pretty fragmented,” one of my venture capital friends said.
One of the ideas I’ve had over the past year or so, when it became clear that institutions like Fidelity weren’t in the market to acquire a robo advisor, is that a neobank should buy one. It’s obvious that several of them will want to move into wealth management at some point. Chime CEO Chris Britt has told me it’s something they’re looking at, and they already do roundups to help people put money into savings like Acorns and Stash. It makes sense for other well capitalized neobanks to explore adding these products too.
What neobanks have going for them is that they’ve raised a ton of capital over the past couple of years, and they have an engaged customer base that should be more likely to try new products if they add them on (cross selling is notoriously hard in fintech). Is it that crazy that a Chime, NuBank, Revolut, or N26 buys a Wealthfront or Betterment for $500M to $1B in cash and equity and instantly gained millions in AUM and a slew of customers that they didn’t have before that will now be using their debit cards and other services for an instant revenue boost without too much added cost?
I chatted with Ian about this to get his thoughts on the product side of things. From his perspective, neobanks adding wealth management services make a ton of sense. The reason they haven’t is that there aren’t that many infrastructure companies in the wealth management space. DriveWealth and Alpaca have focused on helping companies build products to buy stocks, but beyond equity purchasing, there doesn’t seem to be many companies focused on letting other companies build roboadvising services. That seems to be an untapped area of fintech.
On the flip side, several roboadvisors have been trying to encroach on the neobanking turf with their own debit cards and checking/savings like accounts. So, both sides of this equation are just going after each other—trying to rebundle the other. I wonder why there hasn’t been more of a consolidation or even partnering on some of these instead (I’m guessing revenue reasons).
Roboadvisors haven’t done a great job breaking into the debit card space, so perhaps the neobanks don’t feel threatened. And neobanks have made a substantial move into wealth management, so roboadvisors aren’t worried either. There’s still the issue of how much each company thinks it would cost for them to build these services themselves and bring them to scale.
Another factor might be that bankers looking at potential deals—such as the ones at JP Morgan that were thinking about buying Personal Capital and others—can’t find a way to make the numbers work for both sides of the aisle. For years, I’ve been watching for M&A as closely as others have been watching for the credit cycle to turn. Perhaps COVID is the straw that breaks the camel’s back—both sides get a bit more flexible on the numbers they’ll accept in a deal. A lot also depends on how much financial runway the startups have before they have to raise capital again. It’s been a few years since Wealthfront and Betterment have raised, with Acorns and Stash more recent than that. In any case, I’d think everyone is on the lookout for a good deal right now, and wealth management is no different.