UBS recently re-entered the robo-advisory market through its $1.4bn acquisition of wealth management provider Wealthfront. However, this is not its first foray in the robo-advisor space.
The deal was just four years after the financial institution closed its SmartWealth solution and sold the technology to US robo-advisor SigFig. At the time, UBS said it was satisfied with the commercial progress of the division, but felt the near-term potential was limited.
The robo-advisor market has come a long way since 2018. Companies like Betterment, eToro and Wealthfront have shown the success players can experience. For example, Betterment reached unicorn status in late 2021, reaching a $1.3bn valuation.
A report from Allied Market Research expects the robo-advisor market to exceed $41bn by 2027, growing by a CAGR of 31.8% from 2020.
Speaking on UBS’ move back into the sector, Currencycloud head of business development Alexander Barr said, “A lot has changed since the summer of 2018. There have been huge leaps forward in financial technology and financial literacy.
“Retail investors have realised they can ‘influence’ the market, as we saw with the Gamestop situation in early 2021. The influx of new users on a variety of different platforms has ultimately re-shaped the investing landscape. It’s no longer just about big investment firms making millions a year, your average person now has more confidence investing in an area they may have felt alienated from in the past.”
Laurent Lamblin, concept manager at everyoneINVESTED, also felt the different landscape of the robo-advisor market was the reason for UBS’ next foray in the market. Lamblin said, “The low-interest environment and current negative real rates urge financial institutions to look for other means to turn costly deposits into fee business. Robo-advisors are gradually evolving from enhanced execution-only to bespoke digital advice.” Additionally, Covid-19 has encouraged more people to engage with their money and look for digital investment opportunities.
However, there is still a question of how successful UBS will be in the market and if its Wealthfront division will have a similar doomed fate. Barr said, “In 2018 I think UBS underestimated how expensive it is to acquire customers and make them profitable in a competitive market.
“Two years later Wealthfront brings something a little more to the party. Their focus has always been Millennials and GenZers – a high growth segment that will own a very large piece of the world’s wealth in the years to come. In addition, Wealthfront brings $25bn AUM and growing to UBS, so I don’t see this relationship going the same way as SmartWealth.”
Wealthfront has already got a huge market presence, helping UBS hit the ground running. With a customer base of 470,000, which is predominantly millennial and Gen Z investors, UBS is in a prime spot for the market.
Lamblin also felt there is optimism for UBS, but only if they understand the challenges ahead. “The most challenging for robo-advisors is getting people through the digital advisory processes with a limited dropout rate. Capturing the clients’ emotions remains an essential part of this process. Several institutions play with the idea of hybrid models to integrate the “human touch,” but the acquisition cost of these models is too high to tap the full potential of the retail market.”
Market consolidation?
There has been a rising number of traditional financial institutions acquiring or investing into robo-advisory platforms over the past year. Most recently, investment firm M&G acquired a minority stake in Moneyfarm as part of a £44.1m investment. As part of the deal, the two companies established a partnership that will see M&G leverage Moneyfarm’s technology, investment guidance and digital capabilities to build its own branded proposition.
Another big deal saw JP Morgan Chase acquire British digital wealth manager Nutmeg in a deal worth around £700m. This deal is part of the bank’s move into the UK retail banking and investment market and will take over 2,100 private investment accounts.
As traditional financial institutions look to enter the market, it seems buying existing players might be a key entry point. Barr said, “Traditional players are realising that Millennials and GenZers are thinking about their personal finances in an entirely different way and that technology is giving them access to investment opportunities that were previously out of their reach.
“But building these platforms takes an expertise and skill-set that legacy institutions simply don’t have in place. The options? Build a team and invest the time to build your own solutions (something that has proven to be beyond most), or acquire the technology instead and hit the ground running, widening audience reach and new customer bases immediately.”
With the sector getting bigger and players fighting for market share, Lamblin believes there is going to be further consolidation of the market over the coming years.
