The robo-advisor has cemented itself as one of the key platforms for capturing young investors, using low fees and transparency to attract the tech-savvy generations. In the last decade, the financial services industry witnessed the ascension of startups like Personal Capital, Betterment and Wealthfront, and more recently, the launches of platforms like COIN, SoFi and Swell Investing. Incumbents were quick to go on the defensive, with wirehouses such as Wells Fargo and Merrill, discount retailers like E*TRADE and Fidelity and institutional banks such as UBS and now JPMorgan Chase launching their own platforms to gain a foothold in the mass affluent market.
Unfortunately for startups, incumbents have had an easier go of it. According to Corporate Insight’s 2018 Digital Investor Survey, 42% of digital advice customers had existing relationships with their firms prior to opening their digital advice accounts. For instance, 90% of Vanguard Personal Advisor Services’ AUM come from legacy assets. As robo-advisors have become a staple of wealth management services among incumbents, startups have been forced to compete with firms that have millions of existing customers, scalability and cross-selling opportunities. This has raised one of the more pressing questions in the robo industry: how can startups survive in a saturated marketplace increasingly controlled by established industry players?
The answer for some is a change in business model, either through advisor-facing solutions—such as Betterment for Advisors and SigFig—or establishing white-label technology partnerships. SigFig, for instance, adopted a B2B2C business model in 2017 when it began white labeling its technology to incumbents like Citizens Bank, Wells Fargo and UBS, moves that effectively gave the firm access to 70 million customers. Then, in March 2019, SigFig launched SigFig Atlas, a sales platform that helps retail banks sell automated investment products. The platform leverages SigFig’s algorithm-based technology to analyze clients’ financial needs and provide recommendations. While keeping in line with SigFig’s B2B2C business model, SigFig Atlas is also indicative of a newer, but more prominent, avenue for expansion and differentiation: banking.
In the summer of 2018, Acorns and Betterment kicked off the ever-growing trend among robo-advisors of launching banking or cash management products. Acorns announced Acorns Spend, a checking account with a debit card that is bundled with Acorns’ investment and retirement accounts. Betterment’s new services and features—including its Smart Saver portfolio, Cash Analysis and Two-Way Sweep—help the firm to monetize idle cash and funnel additional assets into its investment accounts. This trend signifies an effort on the part of firms to consolidate assets from existing clients, attract new assets, diversify revenue streams and establish themselves as one-stop-shop financial hubs for investors.
As for other robos, Wealthfront followed up in February 2019 with an FDIC-insured high-yield cash account, which offers one of the highest APYs in the industry at 2.51%. In addition to the cash account, the firm is partnering with Green Dot to bring a Visa debit card—as well as automatic bill pay and direct deposit functionality—to Wealthfront customers. Just this month, hybrid robo Personal Capital became the latest firm to offer banking services to customers with its Personal Capital Cash service, an FDIC-insured (up to $1.25 million) high-yield cash account with no minimums, fees or transaction limits. Similar to Wealthfront, Personal Capital is looking to add a debit card and payment functionality to its banking service in the future.
This pro-banking trend is likely to continue as competition for deposits increases. However, as more fintechs expand into banking, startups will have to look for other ways to diversify. Much like its role in initiating the banking trend, Betterment may be the first startup to do so.
This month, Betterment threw its hat into another ring: HSAs. Some three million Optum Bank HSA holders will now have the option to invest some or all of their HSAs with Betterment, which will provide portfolio allocation recommendations based on investors’ planned medical expenses and reported retirement savings goals. HSAs, much like banking, will provide Betterment with access to a market that it previously did not serve, one which is projected to reach $75 billion by the end of 2020. Perhaps more importantly, access to three million Optum Bank customers will increase Betterment’s brand awareness among potential investors without forcing the firm to shell out money for expensive marketing campaigns, helping the firm to overcome the high acquisition costs typical of startups.
Ultimately, however, adjacency expansion will not guarantee success in a saturated market, particularly for digital advice services that maintain a B2C business model. Robo startups’ survival largely hinges on two key factors: firms’ ability to effectively market to consumers in the early stages of their financial lifecycle and to maintain their value proposition as a low cost, top-of-the-line digital experience.