Few pure robo-advisors remain raising questions for Wealthfront
Skeptics say pure robo-advisors will have limited medium-term success; adding successful robo-advisors also have a traditional advisor element, while platforms focused more on the consumer side have plateaued. Over the past year, a number of pure B2C robo-advisors have been acquired, meaning that Wealthfront is one of the few truly B2C platforms remaining. Will it go the Betterment route of creating an institutional platform, succumb to the current trend and be acquired by a traditional or try to go it alone? 

Gone are the days where robo-advisers were simply considered threats to traditional advisory firms. Now, these digital-advice platforms are threats to each other as competition ramps up — all while mergers-and-acquisitions activity in the space heats up.

Institutions across the industry — from adviser-oriented technology companies like Envestnet and insurers like Northwestern Mutual to asset managers like BlackRock Inc. — are scooping up automated investment services. There have been several significant robo acquisitions over the last year.

There are two reasons in particular for this trend: Acquiring a robo platform is a quick way for a firm to enter the digital-advice market, and if the right one is chosen at the right time, it come with a more reasonable price tag compared to the costs of building an automated investment service from the ground up.

That’s when robo-advisers need to decide if they should sell themselves or keep up the good fight as an independent company. A lot of professionals watching the robo market think that there will be a rapid increase in acquisitions in the next year-plus.

“A lot of these firms have grown out of the startup stage and they are facing a decision to either try and crack the retail market, which is difficult to penetrate, or they need to think of an exit strategy,” said Sean McDermott, lead analyst at Corporate Insight, a research consulting firm. “That could be an acquisition or major partnership or going public.”

Two of the biggest robo-advisers, Wealthfront and Betterment, each with about $2.6 billion in assets under management, are safe for now, many say, mostly because their valuations are too rich for a firm to easily buy them. Those two companies are instead focusing on building their respective brands, with with ads on television and yellow cabs around New York, in addition to aggressive digital marketing initiatives.

Neither firm responded to requests for comment.

@BillWinterberg when you want the tech, and not the AUM. — James Osborne, CFP® (@BasonAsset) August 26, 2015

Smaller robo-advisers, on the other hand, are easier targets for acquisition.

FutureAdvisor, which BlackRock acquired on Wednesday, is an example of an established robo-adviser that was relatively well-known, but whose more modest AUM total — $600 million — made it a more manageable acquisition for the asset management giant to pull off.

“They are not growing, they are running out of cash, [and] they are not going to be able to raise the next venture round to stay in business,” said Aaron Klein, chief executive of Riskalyze, a risk tolerance technology provider that offers the white-labeled robo-adviser platform Autopilot.

“I would predict that any but the top two, Wealthfront and Betterment, probably have a greater than 50% chance of being sold in the next 12 months,” Mr. Klein said.

He gave direct-to-consumer robo-adviser SigFig as an example.

Michael Sha, co-founder and chief executive of SigFig, said the company is not planning on being acquired anytime soon, but said that an integral part of keeping the business running smoothly was through partnerships with enterprise institutions.

“It is much more likely the vast majority of relationships that are getting built are partner-based because only a few companies have the right resources and expertise to be able to build it,” Mr. Sha said.

“There will be M&A, it is true, of some of the really small firms,” he said. “Until they get meaningful traction or get well-funded, they may have a harder time remaining independent over the long term.”

#Blackrock to acquire #futureadvisor. I think that is a smart move as it is a big fintech but calmer than #betterment or #wealthfront — J. Fuhrmann (@joeforemann) August 27, 2015

Overall, the robo-advisory market’s AUM is accelerating. According to a Corporate Insight study, robo-advisers were giving paid advice on $21 billion in investor assets as of July, a 34% increase from the previous July and an 11% increase from December.

Mr. McDermott attributed the increase in robo-advisers’ assets to some of the bigger firms like Charles Schwab & Co. and the Vanguard Group Inc., both of which came out with their own robo platforms.

“It serves to validate the business model,” Mr. McDermott said. “Some may see Schwab and Vanguard offering it and think it must be legitimate and safe to go with Betterment, Wealthfront or FutureAdvisor.”

At the same time, it makes the smaller robos more susceptible to an acquisition, which may be just what they want. Some startups have an acquisition in mind as a potentially attractive exit strategy for their venture-capital backers.

“I think a lot of these firms are looking to be acquired,” said Joel Bruckenstein, the founder of the Technology Tools for Today conference series. “As more competition comes into the field, they need to develop additional products and services, and you need money to do that.

“Having a corporate partner or corporate owner that has deeper pockets certainly allows you to spend a little more on R&D,” he added.

Matthew Kane, the co-founder of the robo-adviser Hedgeable, agreed with that assessment.

“FutureAdvisor is not the last startup to get acquired, I would say even to the end of the year,” Mr. Kane said. “I don’t think there’s enough room.

“Before FutureAdvisor got acquired you had four, five firms doing kind of the same thing,” he said.

He does think one of the big players will be taken out.

“I would say it’s hard for Betterment and Wealthfront to both still co-exist,” Mr. Kane said.

Larger firms in the industry who do not already have robos of their own are getting ready to jump in. LPL announced at their annual conference in July that it would be rolling out a robo-adviser of its own in a few months.

Pershing announced in June that it would team up with robo-adviser Marstone to offer an automated investment service that advisers can implement.

Fidelity paired up with Betterment earlier this year to allow its adviser clients to use the robo’s institutional platform.

Wells Fargo & Co. and TD Ameritrade Inc. have not revealed whether or not they plan to implement a robo-adviser of their own yet.

Blackrook understands the next tidal wave of investors will demand digital, and this transaction proves it – http://t.co/flw8oRkGge — Russ Kliman (@russ_kliman) August 27, 2015

Because technology evolves so rapidly, it may be easier for firms to buy instead of build. That’s one of the reasons that Frank Porcelli, a managing director and the head of the U.S. retail business at BlackRock, said that his firm chose to acquire FutureAdvisor, and also one of the reasons Envestnet acquired Upside.

“Firms are already established but want to deliver more robust and interesting client experiences, and you can do that through acquisitions,” said Rich Cancro, chief executive of Vanare, which in December acquired robo-adviser NestEgg. “[Firms] may not have the culture or skill set to deliver that to the end client [by building their own technology].”

Meanwhile, adviser-facing robo-advisers will have to stay on top of their game. Many of the firms that pick up these automated investment platforms are switching them from business-to-consumer models to business-to-business models, or at the very least adding an enterprise version, as BlackRock plans to do with FutureAdviser.

“It is fascinating to watch as these companies who were founded with the idea of putting advisers out of business continue to sell to large firms that serve advisers,” Mr. Klein said. “It is a testament to the value that human advice brings to the investing process.”