In the wake of BlackRock's FutureAdvisor deal, which independent robo-adviser will be bought next?

As robo M&A heats up, it's not necessarily about the specifics of the technology offering, but rather the speed to market for the acquirer — and the right price tag

Aug 27, 2015 @ 2:23 pm

By Alessandra Malito

Gone are the days where robo-advisers were simply considered threats to traditional advisory firms. Now, these digital-advice platforms are threats to each other as competition ramps up — all while mergers-and-acquisitions activity in the space heats up.

Institutions across the industry — from adviser-oriented technology companies like Envestnet and insurers like Northwestern Mutual to asset managers like BlackRock Inc. — are scooping up automated investment services. There have been several significant robo acquisitions over the last year.

There are two reasons in particular for this trend: Acquiring a robo platform is a quick way for a firm to enter the digital-advice market, and if the right one is chosen at the right time, it come with a more reasonable price tag compared to the costs of building an automated investment service from the ground up.

That's when robo-advisers need to decide if they should sell themselves or keep up the good fight as an independent company. A lot of professionals watching the robo market think that there will be a rapid increase in acquisitions in the next year-plus.

"A lot of these firms have grown out of the startup stage and they are facing a decision to either try and crack the retail market, which is difficult to penetrate, or they need to think of an exit strategy," said Sean McDermott, lead analyst at Corporate Insight, a research consulting firm. "That could be an acquisition or major partnership or going public."

Two of the biggest robo-advisers, Wealthfront and Betterment, each with about $2.6 billion in assets under management, are safe for now, many say, mostly because their valuations are too rich for a firm to easily buy them. Those two companies are instead focusing on building their respective brands, with with ads on television and yellow cabs around New York, in addition to aggressive digital marketing initiatives.

Neither firm responded to requests for comment.

Smaller robo-advisers, on the other hand, are easier targets for acquisition.

FutureAdvisor, which BlackRock acquired on Wednesday, is an example of an established robo-adviser that was relatively well-known, but whose more modest AUM total — $600 million — made it a more manageable acquisition for the asset management giant to pull off.

"They are not growing, they are running out of cash, [and] they are not going to be able to raise the next venture round to stay in business," said Aaron Klein, chief executive of Riskalyze, a risk tolerance technology provider that offers the white-labeled robo-adviser platform Autopilot.

"I would predict that any but the top two, Wealthfront and Betterment, probably have a greater than 50% chance of being sold in the next 12 months," Mr. Klein said.

He gave direct-to-consumer robo-adviser SigFig as an example.

Michael Sha, co-founder and chief executive of SigFig, said the company is not planning on being acquired anytime soon, but said that an integral part of keeping the business running smoothly was through partnerships with enterprise institutions.

"It is much more likely the vast majority of relationships that are getting built are partner-based because only a few companies have the right resources and expertise to be able to build it," Mr. Sha said.

"There will be M&A, it is true, of some of the really small firms," he said. "Until they get meaningful traction or get well-funded, they may have a harder time remaining independent over the long term."

Overall, the robo-advisory market's AUM is accelerating. According to a Corporate Insight study, robo-advisers were giving paid advice on $21 billion in investor assets as of July, a 34% increase from the previous July and an 11% increase from December.

Mr. McDermott attributed the increase in robo-advisers' assets to some of the bigger firms like Charles Schwab & Co. and the Vanguard Group Inc., both of which came out with their own robo platforms.

"It serves to validate the business model," Mr. McDermott said. "Some may see Schwab and Vanguard offering it and think it must be legitimate and safe to go with Betterment, Wealthfront or FutureAdvisor."

At the same time, it makes the smaller robos more susceptible to an acquisition, which may be just what they want. Some startups have an acquisition in mind as a potentially attractive exit strategy for their venture-capital backers.

"I think a lot of these firms are looking to be acquired," said Joel Bruckenstein, the founder of the Technology Tools for Today conference series. "As more competition comes into the field, they need to develop additional products and services, and you need money to do that.

"Having a corporate partner or corporate owner that has deeper pockets certainly allows you to spend a little more on R&D," he added.

Matthew Kane, the co-founder of the robo-adviser Hedgeable, agreed with that assessment.

"FutureAdvisor is not the last startup to get acquired, I would say even to the end of the year," Mr. Kane said. "I don't think there's enough room.

“Before FutureAdvisor got acquired you had four, five firms doing kind of the same thing," he said.

He does think one of the big players will be taken out.

"I would say it's hard for Betterment and Wealthfront to both still co-exist," Mr. Kane said.

Larger firms in the industry who do not already have robos of their own are getting ready to jump in. LPL announced at their annual conference in July that it would be rolling out a robo-adviser of its own in a few months.

Pershing announced in June that it would team up with robo-adviser Marstone to offer an automated investment service that advisers can implement.

Fidelity paired up with Betterment earlier this year to allow its adviser clients to use the robo's institutional platform.

Wells Fargo & Co. and TD Ameritrade Inc. have not revealed whether or not they plan to implement a robo-adviser of their own yet.

Because technology evolves so rapidly, it may be easier for firms to buy instead of build. That's one of the reasons that Frank Porcelli, a managing director and the head of the U.S. retail business at BlackRock, said that his firm chose to acquire FutureAdvisor, and also one of the reasons Envestnet acquired Upside.

"Firms are already established but want to deliver more robust and interesting client experiences, and you can do that through acquisitions," said Rich Cancro, chief executive of Vanare, which in December acquired robo-adviser NestEgg. "[Firms] may not have the culture or skill set to deliver that to the end client [by building their own technology]."

Meanwhile, adviser-facing robo-advisers will have to stay on top of their game. Many of the firms that pick up these automated investment platforms are switching them from business-to-consumer models to business-to-business models, or at the very least adding an enterprise version, as BlackRock plans to do with FutureAdviser.

"It is fascinating to watch as these companies who were founded with the idea of putting advisers out of business continue to sell to large firms that serve advisers," Mr. Klein said. "It is a testament to the value that human advice brings to the investing process."

0
Comments

What do you think?

View comments

Upcoming event

Sep 24

Conference

Diversity & Inclusion Awards

Attend an event celebrating diversity and inclusion as well as recognizing those who are leading the financial services profession in this important endeavor. Join InvestmentNews, as we strive to raise awareness, educate and inspire an... Learn more

Most watched

Events

Finding your edge from Tony Robbins

Guru Tony Robbins has helped a lot of people, but armed with his psychology Financial Advisor Josh Nelson has helped his practice soar.

Events

Finding innovation in your firm

Adam Holt of AssetMap explains how advisers understand they need to grow, but great innovation may be lurking right under your nose.

Latest news & opinion

The growth of factor-based investing

Advisers are making decisions about clients' portfolios by using the same characteristics that govern factor-based ETFs.

Finra makes its list to target hundreds of rogue individuals

The regulator sees patterns in the behavior and disclosures of high-risk brokers.

LTC insurer offering co-pays to blunt soaring premium increases

John Hancock policyholders would get a discount on their premium in return for agreeing to pay a bigger portion of their claims in the future.

Goldman Sachs acquires United Capital

After a payday of $75 million or more, CEO Joe Duran plans to join Goldman in a senior position.

Private equity loves IBDs, but will that last?

Three big acquisitions in less than a year signals renewed life in the formerly beleaguered industry.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print