Years ago, who would have ever thought that a broadly stable system such as the financial services industry could be disrupted by technology? How could skilled financial advisors risk losing their jobs to computer algorithms? How on earth could humans ever trust a machine with something as valuable and confidential as their finances? Well, roboadvisors are successfully disrupting the traditional finance industry by offering financial advice and investment management knowledge to consumers with limited to no human intervention required. Roboadvisors are retail-focused, automated wealth management services that use algorithms to evaluate a customer’s risk tolerance and manage assets in low-cost portfolios of exchange-traded funds. The primary customer value proposition of roboadvisors is that they offer investment services to individuals and retirement plans at a fraction of the cost of traditional human advisors. As a result, assets under management (AUM) and total number of retail accounts at roboadvisors has steadily been increasing since 2012. As shown in the charts below, AUM at roboadvisors has grown at a CAGR of +124% from 2012-2015 and number of retail accounts has grown at a CAGR of +639% from 2012-2015.
Wealthfront, an automated investment service firm that manages over $8.2bn in assets based out of Redwood City, California, is one roboadvisor platform that has been able to capture immense value within the fintech market. Wealthfront captures value within the industry primarily through the collection of fees from customers in the B2C market. As shown in the chart below, Wealthfront collects 0.25% in annual management fees for account balances of $10,000 or higher. This fee amount is below competitors such as Personal Capital and Xulu but in line with competitors such as Betterment, Acorns, SIGFIG and TradeKing.
Secondly, roboadvisor start-ups such as Wealthfront has also been able to capture value in the market through partnerships, capital investments or outright acquisitions by incumbent financial industry players. Many consumers were drawn to the fintech market following distrust of the traditional financial players after the financial crisis. However, one of the primary risks facing roboadvisors is their lack of brand recognition by customers and therefore high customer acquisition costs. As a result, many roboadvisors have moved from a B2C model to a B2B model where they partner with incumbent financial players to offer their services to consumers. For example, Northwestern Mutual acquired Learnvest, Blackrock acquired FutureAdvisor, and Invesco acquired Jemstep.
Wealthfront offers investment services for consumers interested in investing their savings, planning for a home purchase, planning for retirement or college, or borrowing a portfolio line of credit to access cash against their investments. For consumers who are interested in opening up an account to invest their savings, Wealthfront first starts by assessing the consumer’s risk tolerance. Similar to a traditional financial advisor, the Wealthfront platform asks consumers a series of questions about their age, pre-tax income, rationale for investing and preferences, tax filing status and a behavioral question to assess risk appetite for portfolio losses/gains. Within seconds, the algorithm proposes a diversified investment plan for a user (similar to the plan below) and prompts the user to open an account and transfer cash to begin investing. Consumers are enticed to try the service through offers such as a low $500 minimum account balance requirement and a promotion that allows for the customer’s first $15,000 to be managed with no fee.
My personal view is that roboadvisors such as Wealthfront are the clear winners within the financial services industry and traditional financial advisory companies are losing. As Generation Z and Millennials continue to dominate the working population and Baby Boomers retire, their high adoption of fintech platforms places further pressure on the traditional financial services companies to react. As shown below, in a survey of US internet users, 76% of Generation Z respondents were comfortable using a fintech provider and 70% of Millennials respondents affirmed that view. As Baby Boomers and Seniors continue to age, traditional financial services companies will need to continue to adopt fintech technologies and services to meet the needs and demands of the Generation Z and Millennial demographics. Traditional financial services players will need to adopt fintech technologies to continue to be viable players within the industry.