The Rise and Fall of the Robo Empire

Jun 27, 2017

robo

It seems like robos (I will use this affectionate moniker throughout this post) have been with us forever. In fact the first robos came on the scene in 2008/2009. They have completed an arc from creating fear of making advisors redundant to being part of the financial services furniture in a brief nine year period. In this post I’ll highlight the key events in this life story. I’ve outlined dates for the different phases. These are indicative, to give an idea of when that phase was occurring. There will be individual cases that happened outside these approximations.

Birth (2008 to 2010)

So what caused robos? Venture capitalists in Silicon Valley saw an opportunity to fund a whole slew of start-ups for the following reasons:

  • Advisors typically charge 100 basis points for advice almost irrespective of what services they are offering. This lack of connection between value and payment was ripe for disruption.
  • Turnkey Asset Management Providers (TAMPs) and other financial institutions have built the platforms necessary for complex asset management over the last 20 years. The robos were able to leverage that existing technology. The piece existing firms did poorly, which the robos do well, was the user interface and putting the investor in the driver’s seat.
  • A new generation of investors was coming through who was tech savvy and who did not want to delegate their investment decisions to an advisor.
  • The 2008 crash occurred which unsettled investors, made them question their advisors and led a drive to passive investing – which is where the robos shine.

Gold Rush (2008 to 2012)

Once the starting gun went off, there were many robos who opened their doors and were funded. The three who have been the main face of the robo movement are Wealthfront (2008), Personal Capital (2009) and Betterment (2010). These three have been in the news the most often and have been trend-setters. In the Peloton (an analogy for you cyclists) was a pack including FutureAdvisor, Hedgeable, Jemstep, LearnVest, Motif, NestEgg, SigFig, Trizic, Upside, and WiseBanyan.  All these are (were) good companies who carved out specific niches within the robo world. They created great software in a short time all focused on giving the investor, and sometimes the advisor, a great experience. The list here is just a subset of the better known firms; there were several more. This was a big movement!

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Pivot (2013 to 2014)

It is rare that any start-up company has the correct vision from the start; the market stays the same and they execute to success without changes in strategy. The robo companies were well run and they refocused on new opportunities and markets as necessary. In FinTech slang this is the ‘pivot’. The main driver for robo pivoting was the high cost of client acquisition. Robo’s acquisition costs were higher because they had to create a brand new brand (couldn’t help myself). Spending a lot of money to gain a client is even more problematic when the new client does not have much money and therefore the new income is low. The most common pivot was to expand the offering to be an advisor platform (Betterment, Motif and Jemstep), whilst others focused on institutional sales (SigFig and Trizic).

Acquisition (2015 to 2016)

Another typical phase for a new category of startups is the acquisition stage. An exit for a startup is either being acquired by another firm or going public. The latter only happens in very few cases (and in the robo category, none yet) and so the former is a happy event for a startup company if they are successful. The robos hit the acquisition phase with a bang a couple of years ago.

robo

The types of acquirer broke into two: firms that wanted to expand a distribution strategy (asset manager and insurance) and platform firms that wanted the technology and expertise. The former kept the brand of their acquirees; the latter swallowed them whole.

Sleeping Giants (2015 to Present)

When a disruption occurs, existing players see the ripple in the market and move into the action. The two sleeping giants that woke up were Schwab and Vanguard. Vanguard’s story is particularly interesting. They are a virtual only firm who doesn’t have retail offices to engage their clients; they do everything via their web-site or over the phone. They woke up to find that the startups had created a new market for them, and they quickly did some tweaking and created the Vanguard Personal Advisor Services (PAS) group. They then used their brand to become the largest robo, nearly twice the AUM of all the others combined, in two years from a standing start. What’s more, although most of the revenue came from existing Vanguard clients, it is still new revenue as they charge approximately 30 basis points for this new service. It is interesting to see the total Assets Under Management (AUM) that robos have created in the table below. See how Vanguard and Schwab have leveraged the hard work of the startup robos!

robo

Micro-robos (2015 to Present)

In the meantime new categories of robos are emerging. One of the more interesting are the micro-robos who are focused on young people and are only app based. Together they cover a broad range of a young person’s financial needs including the often neglected financial education. Examples of micro-robos are Stash, Acorns and Digit. You can read more about them my previous blog.

Today

Even with the short era of the robos, there are only a couple of pure robos left today. By a pure robo I mean a robo that only markets directly to the consumer without an advisor involved. This model was the starting point of the robo movement. The best known of these holdouts is Wealthfront, who is being as innovative as possible to hold their ground and are touting artificial intelligence as the next robo frontier.

But robos live on and continue to evolve. They have either been acquired and are part of the financial services infrastructure or have had a profound influence on the industry. This includes affecting the way that advisors operate (for instance video conferencing and online scheduling) or the way that financial service companies are creating new offerings (with a focus on the end client and intuitive user interfaces)

Tomorrow

There are specific areas that robo firms are focusing on next. Most robos provide passive investment – another frontier is active management. This requires another level of sophistication in the asset management software which underlies the robo services. Another is to allow the investor more direct choice and customization of their investments at the security level and not just the model level.

But the biggest benefit that robos are providing to investors is the way they are bringing the world of advice to many more people who have not had it in the past. 22% of Americans work with some form of a financial advisor (LIS Study, Putnam Investments, May 2014). This looks like:

robo

However the advice pie will look different in the future. If we define robo-advisors as technology with no advisor involved; virtual advisors as robos with an advisor involved remotely, then the future of advice looks directionally:

robo

Please note that the sizes of these pie slices are a guess and are sometime in the not far off future. Inevitably there will be more pie segments as the robo movement and innovation continues. The upshot is that many more investors will be getting advice in some form than were able to get it before. And for those of you with good eye-sight, you will see that it is my hypothesis that the financial advisor slice will grow too. My take is that as advisors have more technology they will be better able to scale and also service investors with lower investable assets. You see – a win-win for everyone.

This has been a quick gallop through the robo era. I’ve stuck to key points around timelines and themes – there is obviously much more texture which would have made this blog post a book. I hope this story highlights that the rise and fall of the robo empire has been an exciting ride and their effect has been much more than can be deduced by the AUM they have collected.

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Raef Lee

Raef Lee

Raef Lee is the technology contributor for Practically Speaking and also serves as a managing director for the SEI Advisor Network.

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