Invesco joins asset managers in robo race
Robos selling to gain scale; buy side sees ETF distribution role.
Invesco has become the latest big asset manager to move into robo-advisory. In January it bought Jemstep, a US fintech firm that provides a digital platform for investment advisers, helping them onboard clients and providing automated portfolio advice, management and services.
The acquisition follows several other recent deals in the UK and the US. Aberdeen Asset Management bought Parmenion Capital Partners last September. A month before that, BlackRock bought FutureAdvisor, while Fidelity has acquired eMoney Advisor and Schroders bought a stake in Nutmeg in 2014.
The robo-advisers, while not all offering the same services, do have one thing in common – they all bring the asset managers closer to automated investment retail distribution. There are about 100 such firms worldwide, and consultants predict their assets could grow to more than $2 trillion by 2020.
While they have shown an impressive ability to gain credibility in a short time, the robo-advisers’ revenues have yet to pack a punch. Many instead measure their progress primarily on account growth, which Peter Nesvold, managing director at M&A investment bank Silver Lane Advisors, finds analogous to internet-only banks that sprang up in the 1990s.
He points out, however, that internet banks grew much faster back then than robo-advisers are doing today. Why? Early internet banks offered deposit rates two or three times the national average, a more compelling proposition than robo-advisers discounting financial advice to investors that may not currently use an adviser at all.
He predicts that while automated financial advice is here to stay, most independent robo-advisers will lose ground to larger, more-established firms.
“That’s because companies such as Schwab and Vanguard can leverage billion-dollar brands to play catch up in a hurry. If that’s the case, it makes perfect sense for an independent robo to sell now while acquirers are keen to buy the technology before they develop it internally,” he says.
The recent volatility in the stock markets may accelerate this trend, as distress in the public markets also causes dislocation in the private financing markets.
“Given these robo-advisers are still consuming cash and have financing needs, we’re likely to see a wave of consolidation,” says Nesvold.
Those who have sold themselves already are smart to have done so before the sales become forced. Indeed, Personal Capital’s reported dual-track process – of considering both a Series E capital raise and/or a sale of the entire business – suggests that the sense of urgency among robos is heightening.
Asset managers can provide a much bigger springboard for independent robo-advisers than going it alone. Research from Silver Lane estimates that it took Wealthfront about three and a half years and Betterment a little more than four years to generate as many accounts as Schwab did in just 90 days when it launched robo-advisory platform Intelligent Portfolios.
The sale of the robo-advisers marks a shift in strategy, however. Originally developed as B2C businesses, the asset management acquirers are essentially turning them into B2B offerings.
That is the case for FutureAdvisor. Speaking about the acquisition, Robert Fairbairn, global head of BlackRock’s retail and iShares business, says: “Our goal with FutureAdvisor is to be the B2B digital advice partner of choice in the US, giving partners high-quality, technology-enabled advice capabilities to improve their clients’ investment experience.”
Nesvold says that robo-advisers give asset managers a fuller suite of product solutions and deepen their relationship with the wealth management industry.
For Aberdeen, the Parmenion acquisition is a pure B2B play. Parmenion provides portfolios to UK financial advisers. Aberdeen’s group head of brand, Piers Currie, says the purchase is also about future-proofing.
“With some of the UK regulations taking place, the risk is being pushed now from pension funds to end-investors or employees,” he says. “It’s early days in that cycle, but we have to understand the innovation and technology that will enable us to serve in that new environment where investors are doing more themselves.”
Regulatory change, social change and competitive fear are driving the appetite for acquisition, he says. But while some asset managers claim the acquisitions are B2B plays, Nesvold says that they may also be keeping their options open should they decide they need their own digital distributor for their own products, chiefly exchange-traded funds.
Invesco, BlackRock, Schroders and Aberdeen are large ETF houses.
The growing ETF market could be perfectly complemented by the robo-advisory model. Is it a coincidence that Deutsche Bank, a large ETF provider, launched maxblue, an in-house robo-adviser in December? Both JPMorgan and Goldman Sachs, which are also committing to building ETF platforms, have backed Motif, an online digital platform that provides baskets of stocks based on themes.
“It’s feasible in five years’ time that ETFs are the default investment option for younger investors,” says Nesvold. That audience is likely to want digital distribution directly.
So who is next?
Wells Fargo says it is looking for a partner. Nesvold says State Street is a premier ETF manufacturer that has yet to make a big move. By this point, it could soon be a buyer’s market.