As competitive moats shallow, many robo-advisors look to be acquired.

3c11fad

 

 

 

 

Ryan Caldbeck Ryan Caldbeck

Founder and CEO at CircleUp

Robo-advisors are here to stay. The question is, in what form?

Individual investors have flocked to robo-advisors, drawn to the low fees, market-indexed returns, automated tax loss harvesting, and ease of use they offer. The model is as effective, if not more effective, than those built by traditional private wealth management firms; all the while offered at a lower cost. So it’s not surprising to see some project the amount of assets invested through robo-platforms to grow more than ten-fold by 2020 and reach approximately $2 trillion worth of U.S. assets under management (AUM).

Clearly, robo-advisors are good for individual investors: just as online brokerages revolutionized stock trading for the masses 25 years ago, robo-advisors are doing the same for wealth management. But it’s not all rosy. Robo-advisors have a problem, and it’s a big one: the bedrock of their business, the algorithms that power users’ asset allocation, is a commodity.

download (25)

 

 

 

As valuable as the algorithms are to individual investors who lack the time or know-how to build and constantly rebalance a complex portfolio, the underlying algorithms are easy to reproduce. What this means is that there is no core asset to differentiate (and protect) the business from competitors.

Increasingly, senior leaders at independent robo-advisors are awakening to the realization that their businesses have shallow moats. While they’re attracting thousands of customers and billions of assets, their scale isn’t protecting them from the next robo-advisor platform (or service) that emerges with its own flavor of algorithm. That’s why many of these robo-advisors have enlisted investment bankers to help them find viable exit strategies – namely to be acquired. BlackRock’s acquisition of five-year-old FutureAdvisor last summer was likely just the beginning.

I’ve even heard that one robo-advisor plans to white-label its product — which often foreshadows a rapid slide to lower margins in any industry.

Moreover, the dozens of robo-advisors competing to grow AUM are now facing pressure from brokerage houses and wealth advisory firms that are developing their own algorithms in-house. Already, Schwab has launched Schwab Intelligent Portfolios, and Vanguard has launched its Personal Advisor Services. There’s no reason not to expect eTrade, Fidelity, Ameritrade and others to follow suit. (At an analyst presentation last Summer Schwab CEO Walter Bettinger predicted that within a few years all financial services firms will offer proprietary versions of online investment advice.)

It’s a crowded and undifferentiated space—and the odds of long-term survival of independent robo-advisors look small.

Contrast that with an online investment marketplace. As I’ve said before, marketplaces are the best business model. In a marketplace, the core asset is defensible because as the business adds participants—both buyers and sellers—the value of the platform increases for all participants. An investor using a robo advisor gains no added value from more investors using that platform; in a marketplace, however, the network effect means that the addition of more buyers and sellers adds value for all participants. This network effect creates a wide competitive moat, and, consequently, a defensible business model.

As large, well-established investment firms enter the robo-advisor market, investors will be hard pressed to find compelling reasons to switch from say a Fidelity, Schwab or Vanguard to an independent platform given the algorithm (and value proposition) is essentially the same.

Short of selling themselves – or their algorithms, which is one in the same – robo-advisors have few options to create a sustainable business. One thing they can do, however, is differentiate by diversifying their product portfolios. The availability of private equity investments, real estate and debt products, for example, would make a robo-advisor unique in this crowded space.

One avenue worth exploring is partnering with online platforms that provide alternative assets as a long-term strategy. Without product differentiation, however, already low margins will continue to erode for the robo-advisors that manage to survive.

Tags: , , , , , , , , , , ,

HEADLINE NEWS

Crowdfunding initiative seeks proposalsThe Keene SentinelCrowdfunding is a method by which people or organizations raise money for business ideas, personal causes and more, typically from many donors and through online campaigns. Kickstarter and GoFundMe are two platforms that have he [...]

San Francisco ChronicleBusiness crowdfunding has little payoff so farSan Francisco ChronicleCrowdfunding, a term which covers raising money in a variety of ways, not just selling equity, isn't new. Companies have for years been soliciting advance orders or other support on Kickst [...]

Business InsiderCrowdfunding campaign to support the families of Manchester attack victims passes £1 million markBusiness InsiderA crowdfunding campaign to raise money to provide support for the families of those injured and killed in the Manchester terrorist attack has now raised mor [...]

TIMECrowdfunding Campaign Raises $55000 for Homeless Man who Helped Manchester Terror Attack VictimsTIMEA series of crowdfunding campaigns have raised more than £42,400 ($54,800) in support of a homeless man who said he rushed to the aid of people wounded in Monday night's suicid [...]

New York MagazineFacebook Rolls Out Crowdfunding to EveryoneNew York MagazineDepending on your perspective, the rise in popularity of crowdfunding is either a fantastic new way that the internet lets strangers help each other out, or emblematic of the decay of institutional safeguards [...]

Marketplace.orgCrowdfunding has created a whole new consulting industryMarketplace.orgWhen crowdfunding sites like Kickstarter and Indiegogo first got their start, the idea was that all an entrepreneur needed was a cell-phone camera and a dream. That's what 23-year -old entrepren [...]

CurbedNew real estate crowdfunding site focuses on community developmentCurbedCrowdfunding has existed for years, and other firms, such as FundRise and Realty Mogul, have focused on property development, but the Small Change model offers a new spin for the real estate space. For years [...]

ZDNet$300 Windows 10 Surface Pro lookalike makes its crowdfunding debutZDNetChuwi's SurBook is a low-price 2-in-1 tablet PC. Image: Chuwi. In the wake of the Microsoft Surface Pro unveiling in Shanghai, Chinese hardware maker Chuwi has launched its crowdfunding campaign for a Sur [...]

Times of Indiaaurad shahajani: Crowdfunding helps Latur youths get internet ...Times of IndiaVillagers in Aurad Shahajani, while battling water scarcity, came up with 'Digital Rural Connect' (DRC) to keep in touch with the outside world.and more » [...]

Hollywood ReporterAdam Carolla Launches Crowdfunding Campaign for 'No Safe ...Hollywood ReporterThe film, from Carolla and radio host Dennis Prager, is about political correctness at universities.Adam Carolla Is Crowdfunding Doc Criticizing Safe Spaces - VultureVultureAdam Caroll [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

CrowdFund Beat Media

10 things to consider before crowdfunding your product business Starti... upflow.co/l/60v6 pic.twitter.com/K6SuIb5tA5

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |