5/17/2016

TheFutureforRoboAdvisors:BlackRocksLatestAcquisitionIsaSignofThingstoCome::TabbFORUMWhereCapitalMarketsSpeak

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SponsoredbyPortware
Bycomparison,Wealthfront,arobo
28September2015
advisorwithAUMofmorethan$2.5
billion,raised$64millioninasingle
TheFutureforRoboAdvisors:
roundlastyearatavaluationof$700
million.Todate,WealthfrontstotalVC BlackRocksLatestAcquisitionIsa
fundingismorethan$129million.

SignofThingstoCome

FutureAdvisorsmanagementfeeof50
basispointsequatestorevenuesofjust
$3million.Sowithits50employees,
theirmwasmostlikelyoperatingata
loss.Intermsofproitability,however,
itisntalone.Eventhelargestrobo
advisorshavelacklusterrevenues.
RecentTABBGroupestimatessuggest
WealthfrontandBettermenteach
generatelessthan$10millionin
annualrevenues.
RoboAdvisorMarketSegmentation

Thestrategyofmarketinglowtouchpersonalinance
toolsalmostexclusivelytomillennialsledrobo
advisorstorapidassetgrowth,whileallowingthemto
maintainalowcoststructure.Butwhilethisapproach
providedtheupperhandinitially,roboadvisorslikely
cantaffordtogoitalonefortoolong.
Roboadvisorsarebeginningtodiscoverthatbeingthe
lowcostproviderisntaseasyasWalmartmakesit
appear.
JustaskthefolksatFutureAdvisor,aroboadvisor
foundedbytwoformerMicrosoftengineers.Theirms
$600millioninAUMmadeitonethelargestpurerobo
advisoryirms.Sinceitsinceptionin2010,the
companyhadraisedventurecapitalfundingof
approximately$21millionfromplayerssuchasSilicon
ValleyventurecapitalirmSequoiaCapital,valuingitat
roughly$75million.
Butlastmonth,BlackRock,theworldslargestasset
manager,acquiredFutureAdvisorforaprice
tagestimatedbetween$150millionand$200
million.ButinsteadofexpandingtheroboadvisorsB
toCmodel,BlackRockintendstoofferthe
FutureAdvisorplatformtobanks,brokeragesandother
irmslookingtoaccessthespace.
Thisisthelatestexampleinaseriesofsimilaradvisor
relatedintechmovesbylargeinancialservicesirms,
andisarecognitionoftheirneedforpersonalinancial
managementdashboardtools.Earlierthisyear,
NorthwesternMutualboughtLearnVestfor$250
million;andJohnHancockacquiredinancialservices
startupGuideFinanciallastMay.
Chancesarewellseesimilardealsahead.
Whenyoucrunchthenumbers,itseasytoseewhy
FutureAdvisorwouldchoosetosellitself.First,an
acquisitionpriceofbetterthan50timesrevenuefor
thestartuphadtomakeitsinvestorshappy.Andwhile
FutureAdvisorsAUMwasrespectable,itlaggedits
peers,ranking4thinthepureroboadvisorspace.

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5/17/2016

TheFutureforRoboAdvisors:BlackRocksLatestAcquisitionIsaSignofThingstoCome::TabbFORUMWhereCapitalMarketsSpeak

Source:SEC/TABBGroup
TheburnrateamongroboadvisorsmaybeanotherfactorinFutureAdvisorsdecisiontosellitself,becausethe
roboadvisorbusinessmodelhasalawedpricingstructure.
Earlyon,roboadvisorshadtheirstmoveradvantageintargetingmillennialinvestorsbyusingtechnologyand
convenience.Butnowlargertraditionalirmswithscaleareofferingsimilarautomatedservices,atbetterprices.
SchwabnowoffersitsautomatedIntelligentPortfolioserviceforfree.
Vanguardshybridservicegivesclientsaccesstohumanadvisorsforjust35basispoints,lessthanFutureAdvisors
feeforitsautomatedproduct,andrightaboveBettermentsandWealthfrontsfees.
Withassetallocationastheircentralclientoffering,roboadvisorsarestartingtorealizetheyaresellingaproduct
thattraditionaladvisorscanaffordtovirtuallygiveaway.Thisiswherescaleprovidesthebigboyswiththecritical
massroboadvisorshaveyettoachieve.
Addingtothepressureisthedificultyandexpenseofaddingnewclients.Untilnow,roboadvisorshave
predominatelyfocusedonmillennials.Theyrepresenttypicallysmalleraccountsthatgenerallyhavelesstoinvest.
Andasyougouptheclientfoodchain,thecostofeachincrementalclientconversionincreases.Considering
acquisitioncosts,nottomentionexpensessuchasadvertising,roboadvisorsmayneedalltheventurecapital
theyveraisedjusttobreakeven.
[Formoreonthechallengesfacingtheroboadvisoryindustryandthelatesttrends,aswellastherelative
valuesandAUMofallthemajorplayersinthespacepleasecontactTABBGroupforinformationonourlatest
research,RoboAdvisorsvsTraditionalAdvisorsABattlefortheHeartsandMindsofInvestors.]
Thestrategyofmarketinglowtouchpersonalinancetoolsalmostexclusivelytomillennialsledroboadvisorsto
rapidassetgrowth,whileallowingthemtomaintainalowcoststructure.Butwhilethisapproachprovidedthe
upperhandinitially,themodelbecomeslessandlessappealingasroboadvisorstrytoachievescale.
Tocontinuetheirpaceofgrowth,letalonebecomeproitable,theywillneedmorethanafocusonmillennialsto
succeed.ItisestimatedthataroboadvisorneedsAUMof$16billiontoasmuchas$40billiontoreachbreak
even.Thiswillbedificulttoaccomplishrelyingonaretailportfoliomanagementproductalone.
WhichmeanswemayseemoreroboadvisorsfollowingFutureAdvisorslead.
FormorestoriesintheTheBionicTradingDeskSpotlightSeriesclickhere.
TabbFORUMisanopencommunitythatprovidesaplatformforcapitalmarketsprofessionalstosharetheirideasandthoughtleadershipwiththeirpeers.Theviewsandopinionsexpressedare
solelythoseoftheauthor(s).TheydonotnecessarilyreflecttheopinionsofTABBGroup,itsanalysts,TabbFORUManditseditors,ortheiremployees,affiliatesandpartners.

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