As the asset management industry embraces wealthtech, its business model has suddenly become very scalable. That also explains the interest of private equity, writes Han Dieperink in his column for Investment Officer this week.
UBS has purchased U.S.-based Wealthfront with 27 billion dollars in assets under custody. Wealthfront is an automated investment service founded in 2008. It may be seen as fintech, or rather a wealthtech solution. It’s a hefty price, but a bargain compared to what was paid in the Netherlands for earlier wealth-tech companies like Alex and Prittle.
Wealthfront now has almost 500,000 customers. So on average they have a little over 50,000 dollars in their account at Wealthfront. Furthermore, the company charges an annual fee of 0.25 percent, so that points to a turnover of just under 70 million dollars. There are other companies that trade for more than 20 times the turnover, but not many.
Wealthfront’s appeal is that it serves the younger generation, Generation Z and the Millennials who spend an average of six hours a day staring at their cell phones. These are people who are used to managing everything through an app, so why not something as boring as banking. Don’t forget that people would rather have an appointment with the dentist than with their banker.
No aggressive product push
UBS hopes to see many future customers among these young wealthy Americans. Moreover, on the fintech side, there is bound to be some synergy that can benefit UBS, with 3.2 trillion dollars under management. CEO Ralph Hamers wants to give UBS customers the same experience as Netflix and Spotify customers. Relevant content at the right time, backed by an algorithm that does everything in its power to make sure they stay subscribers/customers.
Compared to other wealth management websites, Wealthfront therefore offers a relatively large amount of real content. Not in terms of an aggressive product push, but much more through content designed to prevent big mistakes in the financial field. Wealthfront’s investment office is always coming up with new investment ideas for clients. Wealthfront’s size has also attracted regulatory attention. In 2018, Wealthfront was fined by the SEC for improperly forwarding client testimonials, paying bloggers to tout Wealthfront, and receiving a failing grade on compliance. There is some synergy with UBS in that regard as well.
Not without human advisors
Even at 27 billion dollars, Wealthfront, as one of the largest robo-advisors, is relatively small in the United States in terms of financial advice. The market is primarily made up of registered investment advisors, or RIAs, who together manage 4.3 trillion dollars in assets. The assets of RIAs grew by more than 20 percent last year, faster than Wealthfront. Wealthfront is somewhat unique compared to other robo-advisors as it does not have a human advisor available when desired. Other robo-advisors have gradually realized that they cannot do without human advisors after all.
See for example Vanguard Personal Advisor Services, Schwab Intelligent Portfolios and Betterment. Betterment’s applications are now used by more than 600 independent wealth managers. At the same time, there is consolidation in the independent wealth management market, which means that wealthtech applications can be developed relatively quickly there. Last year there were more than 220 acquisitions in the area of independent wealth managers in the United States.
The reason for these is often the retirement of the founders that do not have a plan for succession. Fortunately, there are plenty of buyers, no fewer than 88 last year. So for every buyer, there were more than two sellers. Those buyers are primarily interested in the profitable top end of the market. In that respect, it is extraordinary that UBS has chosen precisely the loss-making bottom end.
Plug-and-play
Integrating independent asset managers is not easy. It took Schwab and TD Ameritrade about five years to integrate. TD Ameritrade’s advisors initially relied on Schwab’s impersonal call center and do-it-yourself website, which restricted them too much. That too is changing. Buyers now have excellent platforms that sellers can directly connect with, almost plug-and-play.
For example, immediately following its strategic acquisition of independent wealth management firm United Capital, Goldman Sachs merged this unit with the FinLife technology platform and the remnants of FolioFN. Together with Goldman’s knowledge of capital markets and asset management, this allows the company to quickly gain market share in this market.
Revolution in the cloud
Cloud applications are the biggest trend in the asset management market. This ensures that independent asset managers can run their businesses efficiently. It has also caused banks and traditional parties to fall behind in one fell swoop due to their existing and often very outdated IT systems.
This lets even the smallest parties compete with the biggest, with flexibility and personal engagement as icing on the cake. The cloud also makes it easy to join new parties or to grow even faster. Asset management has suddenly become a very scalable model and that also explains the interest of private equity.
The nice thing about this new technology is that it means that the consultant is better able to give personal advice. After all, much of the work is taken off your hands by the machine, so that the consultant can focus on where he or she can make a difference. This means even more added value can now be delivered against the higher fee that a living advisor asks. Ultimately, when making the bigger decisions in life, people still need human confirmation and human contact, which even the best robot cannot provide.
Han Dieperink is Chief Investment Strategist at Auréus Asset Management. Earlier in his career, he was Chief Investment Officer of Rabobank and Schretlen & Co. Dieperink provides his analysis and commentary on economics and markets. His column on Investment Officer Luxembourg appears on Thursdays.