In a crowded robo-advisor marketplace, having different models or pricing is not a differentiator, it’s how you interact with customers that will aid success, according to SenaHill partner Kyle Zasky.
There has been a huge influx of robo-advisors into the market over recent years and while FinTechs were initially deploying the solutions, now many financial institutions have also developed their own. Most recently, Santander released its robo-advisor solution, entering the market late last year and aiming to separate itself from competition by offering personal recommendation rather than just advice.
While it is great consumers have a wide variety of robo-advisors to choose from, it’s becoming harder for new entrants to make a mark in the market. From the investment perspective, Kyle Zasky believes that venture firms are now becoming a lot more selective of what they back. Robo-advisors have been a hot-bed for funding, with a total of $1.1bn being invested between 2014 and 2018 into companies developing these products globally. This capital has been split across 121 deals, according to data by FinTech Global.
Zasky said, “It’s going to be very challenging for another wave of start-ups to get in the game from a cold start. The world is littered with Robo-Advisors who have failed to achieve scale or closed. At the same time, new entrants no longer only have to just compete with each other, but with incumbents who have launched their own digital offering. The contrast between the legacy providers and upstarts is becoming harder to discern. The differentiation is further narrowed as there are a host of companies in the business of providing digital tools to larger institutions who don’t have the skill or desire to develop a holistic offering. Think SigFig or AdvisorEngine as examples of firms empowering larger players to remain relevant in this new digital age.
What is typical in many verticals is happening here too. A trend captures the imagination of investors and a whole cohort of early stage companies land venture funding. They burn through a ton of cash, make many mistakes, and only a few manage to navigate the growth and ultimately survive. Often, it is better not to be first, and the second wave of start-ups benefit from some of those learnings and can leapfrog the trailblazers in the market place.
What has become clear the past three years, is that these upstarts do need a good deal of capital as the financial model requires a certain level of AUM or accounts to ever achieve profitability. Zasky believes companies like Betterment, Acorns, StashInvest, and Wealthfront may have the chops to achieve escape velocity and have a strong future ahead.
“Beneath that high-profile class, there are 20 or 30 that have entered the market as challengers to the challengers if you will. Sadly for them, I think that the funding spigot has tightened from an investor perspective. I don’t that you’re going to hear a new start up getting a $40 million check from a venture firm to create Robo-Advisor number 12. Venture firms are becoming more selective.”
He added, that while venture firms involved probably don’t feel they have overpaid, the valuations have been objectively high which can create issues of their own in later rounds. These businesses are entering their execution mode and need to prove they are capable of converting initial traction into a sustainable opportunity.
The market has seen a decline in the volume of investment and number of deals being deployed into the robo space, according to data by FinTech Global. In 2018, the total number of deals in the sector declined from 27 in 2017 to just 11. In conjunction with this, the total equity deployed also fell, going from $268.6m in 2017 down to $152m last year. This decline does suggest that venture firms are beginning to look more closely at what start-ups they back. Although, this does not mean VCs are not happy making large investments. The second largest investment into a robo advisor company came last year after Wealthfront bagged $75m – the largest deal to close in the space was with Betterment, which raised $100m for its Series E in 2016.
What Zasky has seen, are firms attempting to differentiate themselves in the marketplace, by targeting different audiences or tweaking the pricing model. While having better pricing may appeal to certain clients, it’s not a long-term strategy. The way to ensure the business continues to succeed is by boosting trust with customers and providing the right value…. Not saving someone a few basis points in fees.
Moving digitally has improved the way consumers can interact with their finances, but at the expense of the human interaction. Having a human to interact with can help to build trust, but Zasky believes digital operations can still build this through AI and becoming personalise to consumers.
“I think the way that a company could differentiate itself is though what types of interactions it has with the customers. How do you touch them in a way that’s relevant, and more personalised, instead of just giving an ETS stock allocation? On top, there are other companies around the space, deploying Artificial Intelligence that might be able to surface more information. We want to extract as much from our clients in terms of their full financial picture so that we can digitally start recommending other products and services to them that are relevant.”
In doing this, the robo adviser can begin to replicate a human advisor and start to provide broader financial support. For instance, a consumer may have money invested, but from their financial picture the AI can detect the person is going to be looking for a mortgage soon and so maybe they need help with a loan. Or, customers around the same age and that have similar behaviours, are having their first child, and so the AI can ask if the client has considered insurance.
It’s this holistic knowledge-base that human advisors currently have and digital solutions lack. A human would be asking questions around where the client lives, their family status, how they spend their money, what expenses they have coming, etc, and channel these into its recommendations. “I feel like the technology has yet to be deployed, and it will. It’s coming.”
One of the areas which robo-advisors have looked to support, and it is working well, are markets which have previously been undeserved. While serving those excluded from traditional financial services might mean they do not have a lot of money at the start, if you get involved with them early in their lifecycle, they might start accumulating wealth, Zasky said. Bringing in the more personalised robo technology, could also see add-ons or other financial services being recommended or offered.
Zasky sees a lot of opportunities ahead with this more personalised approach, which start-ups can capitalise on. It is a lot easier for these start-ups to innovate compared to larger incumbents, as they are not held back by bureaucracy. This is helping to change how the market is working. Previously, large institutions didn’t want to partner with smaller start-ups and were under the impression they could build proprietary solutions. But now, the bitter irony is that some of these upstarts are so well funded, that they no longer want/need the larger player.
He concluded, “My theory is that the market has matured, where the young start-ups that are well funded and innovative, are not interested in having a Citibank swoop in and partner or take over. They’re saying to themselves, ‘no we’re disrupting you, we’ve got plenty of her own investor capital, we’re going to create a new insurance offering, or new digital offering, or something of that nature.’ It’s been a bit of a 180-degree shift, where the big boys want to play with the start-ups more than the start-ups need/want to play with the big boys.”
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