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Chasing Fintech Pokemon: The Industry's Robo Adviser Obsession

For wealth management firms, robo advisers have become their own form of Pokémon: they gotta catch them all.

In just the past year, more than 16 firms have invested in existing digital advice companies or launched their own robo-style investing services. While it may seem like the current round of robo advice and financial planning tool acquisitions are an example of following the latest hot trend, there may just be a method to the madness.

Earlier estimates of the potential size of robo-managed assets under management in 2020range from $1 to $2.2 trillion. Recently, these estimates have been revised downward from their previously lofty levels as consumer-only robo-advisers struggled to live up to their promised growth rates, as a result of high customer acquisitions costs.

Recently, when offering my congratulations to a venture capitalist friend whose robo adviser investment exited for a nine-figure sum, I was shocked at his response: “Was it really a good outcome?” he replied dryly. “I’m actually disappointed because it didn’t meet our return objectives.”

So why are large wealth management firms investing in robo advisers?

Regardless of the validity of the hypothetical future size of the robo market, it is clear that if wealth management firms don’t have a digital offering, they are inherently closing the door on new generations of consumers that manage their entire lives with electronic devices.

Separate research has shown that people are most responsive to a hybrid model, especially if they have assets or financial situations that are not super complex. Vanguard and Schwab have demonstrated tremendous success with their hybrid models so it is clear there is a market for this hybrid form of service.

Banks have the power to “make banking like Amazon Prime," namely, providing valued clients with a free automated investment service or a checking account that comes with no-cost brokerage trades as part of a future bundle of digital-banking products. “When you talk about robo and investing, well we can do that, and give it away for free if we want,” said Jamie Dimon, Chief Executive Officer of JP Morgan during an investor presentation in New York.

Combined with the now trite point about inter-generational wealth transfer, it is clear that firms must have a scalable way to service millennials and build brand loyalty now as this generation accumulates and inherits wealth.


It seems every bank or brokerage should offer some sort of digital experience, which takes a while to build in-house. The firms that don’t have a pilot or development program in place are already behind. The alternative is to buy the robo offerings that are still available and rest easy knowing that at least your wealth management firm is not leaving a segment of the market uncovered.

As asset gathering remains the predominant business model, investment managers must upgrade their technology and client experience to do it better. This arms race already happened in consumer banking, and is now happening in wealth management.

Assuming wealth management firms have done their due diligence, the recent valuations seem acceptable for automated investment capabilities that can turn a traditional “brick and mortar” business into a hybrid model, enabling these firms to manage smaller accounts, and gradually integrate these clients into the firm’s existing platform.

At best, wealth management firms can mitigate outflows, keeping customers in-house and happy that they can get everything they need from their financial adviser, and squashing the potential disruption that comes from startups and non-traditional banking players. At worst, it is a relatively cheap option to have a horse in the race, until it is determined whether this is the best model for the foreseeable future.

If I was running a financial institution, I would be collecting fintech Pokémon left and right. Valuations have fallen since the LearnVest deal. Most financial institutions’ core business is not focused on developing technology or UX expertise; in fact, most are terrible at it. The alternative, gradually becoming obsolete, is dire. Expect the deal flow to continue.


Automatic trading technology, itself albeit not completely trivial, is becoming more of a commodity, just like how e-commerce digitized brick-and-mortar retail. The power of the digital model is in the distribution capabilities and the user friendly consumer experience.

According to a recent study, if financial advisers ask their customers to pick between robo-only and human-only, they will go with the latter every time. As existing robo technology can’t seem to disintermediate the human touch just yet, most of them have pivoted towards a B2B model for greater distribution.

If we hold portfolio allocation and investment advice pari-passu, a robo adviser’s core capabilities lie in account opening, automated trading and account access. All these technological features need distribution for broader adoption.

Investments, insurance, and health care are among the last areas where client inertia is high and these industries have been able to get away with outdated technology. But clients today are smarter and you just can’t treat them like kids anymore. They have access to information, and they usually have some ideas and sometimes strong opinions for how they should invest but might just be too lazy to take action.

For example, more clients care about social responsibility and want to explicitly exclude investments in companies that are against their personal beliefs. According to FINRA suitability rules, they are entitled to do that. Can your current technology identify and remove exposure to stocks that your clients don’t want from your model portfolios?

The true competitors are large technology firms who have the broadest consumer base. The BATs (Baidu, Alibaba and Tencents) of China have long offered lending and fixed-income wealth management products in China, and each have different robo plans. I would not be surprised to see their counterparts in the U.S., Facebook, Amazon and Google getting into fintech.


In fact, the most successful and truly large robos are not the start-ups, but the largest index fund providers: Vanguard, BlackRock and Schwab. Active managers saw nearly $20 billion outlfows to passive funds. Robo might have been a small part of that trend.

We have seen funds at mid- and small- active managers where the performance in any dimension has been great but just couldn’t get greater distribution. Not having direct retail distribution as fees compress means smaller managers are being wiped out by these large ETF providers.

Author Bill Bernstein said at the Morningstar conference that the popular message is too focused on just low fees: low cost strategies can have terrible performance, and there are active strategies that generate alpha. I have expressed a similar idea related to the DOL rule. But most retail investors don’t think this way.

The reality though is active strategies are more complex to understand and often harder to access, hence the outflows when performance is not stellar. They also lack the concerted propaganda that low cost funds enjoy.

Active strategies are most in need of client education and stickiness, in other words, they need to be part of a portfolio. In some ways it’s good that the worse funds go away as they would then stop losing people’s hard earned money.

Active managers are in the most danger if they do not adopt the direct digital investment experience. Additionally, robo advisers and emerging technologies are aiming to automate active management and lower the barrier to access sophisticated quantitative strategies.

Integration and adoption of robo advisers at the largest wealth management institutions may take time as advisers still see robos as a threat. We can’t blame the advisers because most robos are built with that DNA.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.