Warburg Pincus invests $33 million in new hybrid robo

Facet Wealth wants to buy RIAs' small accounts and give clients financial planning tech, human CFPs

Sep 10, 2018 @ 5:07 pm

By Ryan W. Neal

This summer's consolidation of robo-advisers isn't stopping new money from flowing into hopeful startups.

Warburg Pincus is leading a $33 million investment in Facet Wealth, a new company that believes its unique growth strategy will avoid the high client acquisitions costs plaguing other digital advisers and attract mass affluent households.

(More: More funding for robo-advisers doesn't quell skeptics)

Rather than advertising directly to consumers, Facet Wealth will acquire small, unprofitable accounts from registered investment advisers and move them onto its digital platform. This will free up capacity and resources for the adviser to focus on growth, while providing smaller clients with better service, said Facet Wealth CEO and co-founder Anders Jones.

Facet Wealth will pay a one-time multiple of the annual revenue earned on those clients — 25% paid up front, 50% after the transition, and the rest after the first year.

Once on the platform, Facet Wealth will offer a menu of services and charge clients a flat subscription fee based on the complexity of services selected. An average client with $350,000 in assets will pay an average of $1,600 in fees, or roughly 45 basis points, Mr. Jones said.

Each client gets a dedicated certified financial planner regardless of asset level. This makes Facet Wealth more affordable than a competitor such as Personal Capital, while offering more financial planning services than similarly priced hybrid robo-advisers, Mr. Jones claims.

He added that there are 8 million households working with an adviser despite having less than the adviser's stated asset minimum, representing "enormous market opportunity" for Facet Wealth. By taking on some of these clients, Facet Wealth won't have to compete with existing RIAs over clients, or spend marketing on attracting retail investors.

Analysts say startups like Betterment and Wealthfront spend more than $100 for each new client, which stagnates growth for the direct-to-consumer companies. The client acquisition costs are only rising as more traditional financial institutions launch their own retail robo-advisers.

"There is plenty of room for us to go in, provide great service to those folks, and not go into the asset land grab that everyone else is engaged in," Mr. Jones said.

The ideal client isn't a young investor with a small but growing account, it's a client nearing retirement who has already maxed out their asset growth, according to Mr. Jones.

"That period of time transitioning from being in the workforce and retiring, it's a tough time," Mr. Jones said. "They are difficult clients to service, and the revenue potential is capped."

Facet Wealth will only take on clients with less than $1 million, and Mr. Jones said the company will transfer accounts back to the adviser if they grow above that threshold. Though he wouldn't disclose how many clients or assets are on the platform, Mr. Jones said Facet Wealth has made 15 deals to buy partial books in its first year.

Will advisers jump at the opportunity to offload clients?

Steve Lockshin, co-founder and principal of Advice Period and a technology investor, isn't so sure. Others have unsuccessfully tried the "buy smaller clients" approach in the past, he said.

"People who already have a client are usually loath to get rid of them," Mr. Lockshin said. After the effort of signing a client in the first place, no one wants to then tell a client they are selling them to a robo-adviser because they aren't profitable enough, he said.

"This is novel in concept, but perhaps naïve," he added, especially when there is plenty of technology already on the market to help advisers profitably serve smaller accounts.

At the end of the day, it comes back to branding, he said. Even if the client acquisition strategy works, Facet Wealth will still face the same competition from big financial institutions that all startups face. "This is still a tough game, and brand still wins the day," Mr. Lockshin said.

But Mr. Jones is confident the combination of Facet Wealth's growth model, flat-fee pricing and proprietary financial planning technology is enough to differentiate it from the competition.

"There are different firms and different companies doing what we are doing, but no one has tied the whole thing together," he said.

Jeff Stein, Warburg Pincus' managing director of financial services, agrees. While markets continue to go up, margins for advisers have remained the same, Mr. Stein said. He also believes there is "a continued lack of strong service offerings to the mass affluent," and Facet Wealth addresses both issues.

Past investments by Warburg Pincus include Yodlee and The Mutual Fund Store. The $33 million his firm is investing will go toward developing the technology and funding the acquisition of more client accounts.

(More: Financial Engines acquires The Mutual Fund Store for $560 million)

"We think it's a really clever way for a go-to-market strategy," Mr. Stein said. "Advisers are truly being held back by a book of business they can't profitably service."

He added that Facet Wealth could help a firm looking to increase its valuation before a sale or generational transition, or to raise capital to support a buyout.

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