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

Marketplace.orgCrowdfunding for your life - MarketplaceMarketplace.org"When I took that phone call, and I learned that this was just going to completely uproot my whole life, I'd say I spent maybe 10 seconds or so only freaking out ...and more » [...]

Omaha World-HeraldCrowdfunding offers easier way to ask for college cashOmaha World-HeraldMore 529 plans, the accounts that give families a way to put away cash for college, are adding crowdfunding-like tools that make it easier for savers to ask family and friends to contribute to a [...]

CNBCWeSearchr: crowdfunding platform becoming home for alt-right causesCNBCIn less than two months, "Daily Stormer vs. SPLC Legal Defense Fund" raised more than $155000 on the WeSearchr platform.and more » [...]

ForbesThis $130 Million Fund Is Leading The Way In Real Estate CrowdfundingForbesWhen people think of crowdfunding, the first word that jumps to mind is Kickstarter. But crowdfunding is not limited to supporting the next card game or independent film. Crowdfunding is becoming a viable [...]

TIMEA Crowdfunding Effort Launches to Commemorate Khadija Saye, Artist Killed in London InfernoHyperallergicOn Saturday, friends and supporters of the artist Khadija Saye — who died in the devastating Grenfell Tower fire in west London last week — launched a crowdfunding campaign to c [...]

CBS NewsNow you can crowdfund a 529 college savings plan - CBS NewsCBS NewsIt's getting easier to have friends and family add their contributions to these accounts for college savings.and more » [...]

Business InsiderCrowdfunding for medical expenses - Business InsiderBusiness InsiderAlmost half of the money raised on crowdfunding sites like GoFundMe and YouCaring is going toward medical expenses. Medical campaigns make up $930 ...Americans Losing Health Insurance Turn To Crowdfund [...]

PCGamesNAshes of Creation is having a special summer crowdfunding campaignPCGamesNFollowing its massively successful Kickstarter that raised over $3.2 million, Ashes of Creation developer Intrepid Studios are extending their crowdfunding efforts with a summer campaign. Designed for th [...]

Forbes"Make Yourself Available" - An Audio Entrepreneur's Tips For Successful CrowdfundingForbesIt takes a brave individual to launch Bluetooth speakers and headphones into a crowded audio market. Take a stroll around your local consumer electronics stores and you' [...]

Lompoc RecordTrikke Tech consolidates operations in Buellton, launches ...Lompoc RecordTrikke Tech Inc. has consolidated all its operations at a new location in Buellton and launched a crowdfunding campaign to help the company expand and ...and more » [...]

CFB Finance

Syml
Lst Val
+/- Val
+/- %

Marketwired

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

Press Release

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 |