InvestmentNews INsider

The INsiderblog

InvestmentNews reporters offer their take on intriguing or controversial articles from around the web.

Writing on the wall for direct-to-consumer robo startups

Client acquisition costs and increasing competition proved too much for Hedgeable

Jul 16, 2018 @ 2:57 pm

By Ryan W. Neal

The consolidation of direct-to-consumer robo-advisers is in full swing.

Hedgeable, an early digital adviser that stood out for targeting wealthier clients with active management, hedging strategies and access to alternative investments like venture capital funds and cryptocurrency, announced last week that it will discontinue its investment management service on Aug. 9.

The news comes just two months after Northwestern Mutual's decision to shut down LearnVest.

In December, Amanda Steinberg closed WorthFM, a female-focused robo-adviser launched in 2015. The WorthFM website, which now directs users to Sallie Krawcheck's Ellevest, cites "industry shifts and our own business" as reasons it can no longer offer investment advice.

The announcement from Hedgeable was surprising, but not entirely unexpected. Industry observers have long forecast doom for the direct-to-consumer startups not named Betterment and Wealthfront as banks, broker-dealers, asset managers, custodians and large RIAs all come out with their own version of digital advice.

But what's driving the consolidation isn't a market downturn that causes investors to fearfully pull money out of their robo-adviser, as many predicted. Instead, venture-backed startups like Hedgeable simply haven't been able to carve out enough market share to remain sustainable, independent businesses.

The biggest problem is, and has always been, client acquisition costs. Conservative estimates peg the cost per client at $100 for the startups. Michael Kitces, partner and director of wealth management at Pinnacle Advisory Group, estimates it could as high as $300, and he has been sounding this alarm since 2016.

"You need a lot of money in order to be successful as a robo if you're not an incumbent firm, if you're not a broker-dealer and have an existing clientele." said Ken Schapiro, the president of Backend Benchmarking, a research firm that publishes a quarterly report on robo-adviser performance. "When [the startups] were originally funded, no one really knew that the client acquisition cost was going to be that high. And now there's a lot more competition; the incumbents all have [a robo-adviser]."

(More: Robo-advisers offering incentives to attract new clients)

Hedgeable raised a total of $1.9 million in funding (its most recent round was in November 2015) and turned that into 1,698 clients and $80 million in clients, according to its most recent Form ADV. Meanwhile, Betterment raised $275 million and manages $14 billion in client assets, while Wealthfront manages $10 billion after raising $204.5 million.

The big two robos still pale in comparison to technology products offered at Charles Schwab and Vanguard, primarily because the companies have simply moved existing client assets to their digital platforms. As Wells Fargo, Merrill Lynch and Morgan Stanley all push out their own robo-advisers, they can simply offer the service through existing channels.

(More: Wirehouses using digital advice technology to boost cross-selling)

"Large firms can use it as a loss leader or part of a customer acquisition strategy," Mr. Schapiro said. "It's just another arrow in the quiver, and you're going to see more of them from the Goldmans of the world."

Most of the other robos have either been purchased, like FutureAdvisor, or have pivoted toward a business-to-business model, like SigFig.

Mr. Schapiro expects Wealthfront and Betterment are large enough to survive for a while, as well as hybrid robo-provider Personal Capital.

But the writing is on the wall for other technology startups, and Hedgeable's closure should serve as a wake-up call.

You're no longer the new tech on the block, and that VC funding will only go so far in buying you customers. I'm looking at you, WiseBanyan.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Mar 14

Conference

WOMEN to WATCH

InvestmentNews is honoring female financial advisers and industry executives who are distinguished leaders at their firms. These women have advanced the business of providing advice through their passion, creativity, inclusive approach and... Learn more

Featured video

Events

4 secrets to adviser growth: Client experience

The client experience is critical for firms to thrive today. This is especially true for your wealthiest clients. SEI's John Anderson and Allie Carey offer some strategies for success.

Latest news & opinion

Top 10 RIAs in the Northeast

These are the largest registered investment advice firms in the Northeastern U.S., in terms of assets under management.

10 predictions for financial advice in 2019

Deloitte expects these 10 changes will hit the financial advice business in 2019.

Midwestern magic? RIA assets soared nearly 30% there last year

Theories for what's driving the growth spurt abound, but it surpassed all other regions of the country.

8 apps advisers love for getting stuff done

We reached out to advisers to find out which apps they are using to run their business more efficiently.

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