The Rise of Robo-Advisors

Part 2

Industry Trends

As the second part to last week’s blogpost, the following section from Jay Wilson’s forthcoming book on FinTech describes ways to think about the valuation of robo-advisors, including some real world examples of technology based investment management platforms that transacted.

Build, Buy, Partner, or Wait and See

Perhaps even more so than other FinTech industry niches, robo-advisory is well positioned for mergers, acquisitions, and partnerships. As mentioned earlier, traditional incumbents are being forced to determine what they want their future relationship with robo-advisors to look like as the role of the financial advisor changes. This quandary leaves incumbents with four options: attempt to build their own robo-advisory platform in-house; buy out a startup and incorporate its technology into their investment strategies; create a business-to-business partnership with a startup; or sit out the robo-advisory wave and continue to operate as usual.

Of these options, we are seeing a rise in incumbents acquiring robo-advisory expertise.  Large firms that have followed this strategy include Invesco’s acquisition of Jemstep, Goldman Sachs’ acquisition of Honest Dollar, BlackRock’s Acquisition of Future Advisor, and Ally’s acquisition of TradeKing.

Other incumbents have elected to be more direct and build their own robo-advisory services in-house.  Schwab’s Intelligent Portfolio service launched in March 2015 and was on the leading edge of traditional players building and offering their own robo-advisory services.  Two months later, Vanguard launched its internally built robo-advisor, named Personal Advisor, which has already become quite large and manages $31 billion in assets.  Furthermore, Morgan Stanley, TD Ameritrade, and Fidelity have all announced plans to release their own homegrown robo-advisories in the future.

The partnership strategy has also popped up among traditional incumbents.  Partnerships allow traditional incumbents to gain access to a broader array of products to offer their customers without acquiring a robo-advisor.  In May 2016, UBS’ Wealth Management Americas group announced a major partnership with startup SigFig in which SigFig will design and customize digital tools for UBS advisors to offer their clients.  In exchange, UBS made an equity investment in SigFig, showing the confidence UBS has in SigFig’s ability to create an innovative platform.  Also, FutureAdvisor, operating under the auspices of Blackrock, announced partnerships with RBC, BBVA Compass, and LPL in 2016 to offer these institutions’ clients more affordable and automated investment advice, as the institutions continue to explore the idea of building their own robo-advisory service.  Personal Capital, a robo-advisor started in 2009, announced a partnership with AlliancePartners to offer its digital wealth management platform to approximately 200 community banks.  As seen in the actions of these incumbents, partnering with a startup is becoming an increasingly attractive option, as it allows the incumbent to give robo-advisory a test drive without wholly committing to the idea yet.

Lastly, we have also seen traditional incumbents elect to ignore the robo-advisory trend altogether.  Raymond James indicated that they would not be offering or launching a robo-advisory platform to compete with its advisors.  Raymond James noted that their core business is serving financial advisors and a robo-advisory solution that offers wealth management solutions directly to consumers does not fit their business model.  They did indicate that they are looking to expand technology and other services to help their investment advisors but noted that robo-advisory is not a solution that they plan to launch presently.

Thus, there are a number of strategic options with varying degrees of commitment by which traditional incumbents can either enter the robo-advisory field, or elect to stay on the sideline near-term. The question of whether to build, buy, partner, or wait and see will become increasingly asked and may extend from large incumbents to smaller RIAs, banks, and wealth managers as robo-advisories continue to pop up across the financial landscape and consumers increasingly desire these products.

For those financial institutions considering strategic options as it relates to robo-advisory, we take a closer look at two of the announced robo-advisory transactions–BlackRock/Future Advisor and Ally/TradeKing–in greater detail.

BlackRock’s Acquisition of Future Advisor1

Blackrock’s acquisition of robo-advisory startup FutureAdvisor for an undisclosed amount in August 2015 is perhaps the most notable example of a robo-advisor acquisition strategy. The acquisition showed the increased staying power of robo-advisors, as Blackrock is the world’s largest asset manager.  FutureAdvisor provides investors with a low cost index investing service that diversifies their portfolio in a personalized and holistic manner based on the individual investor’s age, needs, and risk tolerance.  A series of algorithms automatically rebalance investors’ accounts, constantly look for tax savings and manage multiple accounts for investors. Assets are held by Fidelity or TD Ameritrade in the investor’s name, to assuage investors’ fears concerning safety and accessibility of funds.

FutureAdvisor was founded by Jon Xu and Bo Lu, former Microsoft employees, in early 2010.  Significant funding rounds included a first round of seed funding ($1M in early 2010), another seed funding round and a $5 million Series A issue in 2012 and a Series B issue of $15.5 million in 2014.  As previously noted, following Blackrock’s acquisition announcement in August 2015, FutureAdvisor announced several significant partnerships (BBVA Compass, RBC, and LPL) to offer low cost investment advice to each entities clients.

Bo-Lu, a co-founder of Future Advisor, referred to the acquisition as a “watershed moment, not just as an entity but for the broader financial services industry as a whole.” To better understand the mindset of Blackrock, consider two quotes from members of Blackrock.

“Over the next several years, no matter what you think about digital advice, you would be pressed to argue that it won’t be more popular versus less popular five to ten years from now” – Rob Goldstein, Head of Blackrock’s Tech Division2

“More Americans are responsible for investing for the important life goals, whether that is retirement, education, etc. We think that a broad cross section of that market may be slightly under-served. We believe that is the mass-affluent or those who don’t want to seek out a traditional advice model.” – Frank Porcelli, head of BlackRock’s U.S. Wealth Advisory business3

The acquisition confirmed the increased staying power of automated investment advice.  Blackrock is the world’s largest asset manager and the acquisition of FutureAdvisor signaled Blackrock’s intent to stay ahead of the robo-advisory curve.  In addition, FutureAdvisor’s partnership with LPL, BBVA Compass, and RBC prompted other banks to follow suit, including UBS’ partnership with FinTech startup SigFig and Morgan Stanley’s effort to build its own robo-advisor.

After the acquisition, FutureAdvisor was able to evolve into a “startup within a huge company,” according to founder Jon Xu. The company still held on to the creative culture and environment of a tech startup, but now has the resources and tools of asset management giant Blackrock at its disposal.

The acquisition also reinforced the trend towards a model based on convenience for the consumer rooted in the automated processes. The evolution of financial advising and wealth management will hinge on whether or not the knowledge and personal attention of a human can add enough value to outweigh the benefits of convenience fostered by automation.

Ally’s Acquisition of TradeKing4

In April 2016, Ally Financial Inc., a bank holding company that provides a variety of financial services including auto financing, corporate financing, and insurance, announced an acquisition of TradeKing for a total purchase price of $275 million.  TradeKing is a discount online brokerage firm that provides trading tools to self-directed investors.  TradeKing initially offered some of the lowest cost stock trade commissions (at ~$5 share on equity trades) and was also one of the earlier online brokers to integrate social networking and an online community where customers could discuss trading analysis and strategies.  Interestingly, Ally noted that it was not interested in offering traditional advisor led investment services but it was interested in digital offerings such as robo-advisors and robo-advisory was cited as a primary consideration for Ally’s interest in TradeKing.  In 2014, TradeKing formed TradeKing Advisors, which offers robo-advisory services for a minimum investment of $500.

The acquisition reflected creative thinking in the banking industry as bank M&A is typically primarily about cost savings and secondarily about expansion into new markets.  Revenue synergies are touted periodically in bank acquisitions but they tend to be secondary considerations for investors and bank managers/directors.  The TradeKing acquisition represents a shift in this mindset as the potential benefits from the transaction will largely be in the form of revenue synergies as Ally leverages TradeKing’s brokerage platform and attempts to achieve greater revenues by offering trading and wealth management services to its existing customer base.  Convenience for Ally’s customers was clearly top of mind as evidenced by the following quotes from the CEO of both TradeKing and Ally around the time of announcement:

“Banking and brokerage should be together so you can save and invest—and easily move money between the two.”  Don Montonaro, CEO TradeKing5

“We have a good composition of customers across all demographic segments, from affluent boomers to millennials… Our customers have been happy with our deposit products, but are asking for more from the online bank.”– Diane Morais, Ally Bank, CEO6

End Notes

1Sources:, “Jon Xu Interview”;, “BlackRock To Buy FutureAdvisor, Signaling Robo-Advice Is Here To Stay.”;, “FutureAdvisor co-founder: Risk, robos and ‘hyperpersonalization.”

2Samantha Sharf, “BlackRock To Buy FutureAdvisor, Signaling Robo-Advice Is Here To Stay,” Forbes, August 26 2015.


4Sources for Case Study: Techcrunch; S&P Global Market Intelligence; Various articles including: “Ally, Fidelity to Launch Robo-Advisory Services by Theresa W. Carey on Digital Investor; TradeKing Website; and Bloomberg Business.

5Theresa W. Carey, “Ally, Fidelity to Launch Robo-Advisory Services,” Barron’s, April 23, 2016.