The early stages of a technology company’s life cycle are easy to categorise: identify a gap in the market, come up with an idea and develop the technology.
In the investment industry the opportunity was the advice gap, the idea was providing low-cost investing, and the technology that was developed is online investment services or robo-advisers.
According to the Silicon Valley Bank’s ‘Startup Outlook 2017’, an annual survey of almost 1,000 technology and healthcare executives, around 55% of start-ups see acquisition as the long-term goal. What is true for the wider technology sector might not be the case for the new breed of wealth managers, although sceptics have made the argument that robo-advisers are similarly just looking for a payday.
So what is the real endgame? Will robo-advisers follow the traditional path of brands such as Instagram and Vine, which were bought out by larger industry incumbents, or will they remain independent?
Moola’s recently appointed chief investment officer (CIO) Simon Moore, who went through the full life cycle from inception to sale with US-based Futureadvisor as it was acquired by asset management giant BlackRock, argues this is a dangerous mindset for robo-advisers to have.
‘With any start-up if you are launching thinking you are going to be acquired then you are extremely likely to fail,’ he said. ‘This idea that you can build a business and someone will ultimately acquire you is just wrong-headed because you have so little control of that process.
‘These robo firms have to think about building a compelling consumer offering, leading with that rather than saying these are the steps we need to take to make us as attractive as possible to some larger firms that might acquire us.’
Michelle Pearce, CIO of Wealthify, views either route, staying independent or being acquired, as a viable option for her firm in the future.
But like Moore, she says the emphasis has to be on independent growth rather than becoming a target for acquisition.
She perceives another danger if one only focuses on being acquired and that is taking one’s eye off the ball and falling foul of the Financial Conduct Authority (FCA).
‘I think it [acquisition focus] could be a little bit dangerous in the wealth management industry, just because then you would be focused on very short-term metrics; not things like performance and making sure that you have given the customer a solution that is sensible and appropriate for them and following the FCA’s rules.
‘The line could become slightly blurred, perhaps because you might not be thinking about it, but what if the FCA comes five years down the line and you haven’t covered all your bases – haven’t done the proper suitability checks – because that would not be your problem in a sense?’
Partnering with established players
Perhaps the overarching difficulty for robo wealth firms is the staggering cost involved in building a recognisable brand and marketing the product in general.
This has led to a number of asset managers buying stakes in fledgling robo firms – Schroders’ investment in Nutmeg and Hong Kong-based Convoy’s £24 million funding, as well as Allianz Ventures’ funding of Moneyfarm.
‘The huge problem is there are many robo-advisers that face the immense cost of acquisition; meaning that they pay a lot to attract a customer that brings them a low amount of revenue,’ explained Silvan Schumacher, co-founder and chief executive officer of Swanest, a Belgium-based robo-adviser.
He added: ‘If they want to grow themselves the way Betterment and Wealthfront did in the US, they need a massive amount of money to be put into marketing.’
For Schumacher, Europe does not have the same size common market as the US where firms can potentially attract such a big pool of investors. This, he maintains, has led some robo-advisers to partner up with banks or asset managers to provide services for them.
‘I can also imagine more and more of the smaller ones would consider a buyout by an asset manager or bank simply because they realise that the market is just too hard to succeed so they give up and try to sell their platform to somebody who needs it.’
Moore says partnerships with large asset managers can actually create a symbiotic relationship rather than just being an outright acquisition.
‘So there can be a partnership that doesn’t necessarily lead to acquisition or have an expectation of acquisition, but it is helpful to both parties for knowledge sharing and combining. Your traditional asset manager has some good understanding and insights of the broader space that can be helpful to the start-up,’ he said.
‘Equally the start-up can say to Schroders –or whoever – this is what technology enables – look at what’s possible and where the frontiers are.’
Therefore the route for robo-advice may not be either to oppose the incumbents or to be folded into them. But instead to stand beside them.