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Robo-Advisors Started Fighting over the HNWI Market

Any robo-advisor would like to access the huge client base that banks have at their disposal. This explains why many WealthTech platforms seek partnerships with banks. However, the news is full of reports that banks, especially global ones, are investing in WealthTech platforms themselves. In 2017, MyPrivateBanking (now acquired by Cutter Associates, wealth management research and consulting firm), conducted a survey of 600 HNWIs in the U.S. and U.K. and found that more than 70% of respondents think online and automated investment tools can positively affect their wealth manager's advice and decision-making. At the end of 2018, Morgan Stanley announced that they are speeding their collaboration with tech startups. The robo-advisory timeline clearly shows that the number of newly founded WealthTech solutions is plummeting, while banking partnerships and investments are on the rise. Why is this so?

High-net-worth individuals (HNWIs) are still keeping their millions away from startups, as these involve risk. Despite Swanest say robo advisors still fail to provide the diversification HNWI need, the percentage of HNWIs who want their money to be managed using artificial intelligence and other innovative technologies is increasing rapidly. Responding to the demand, Wealthsimple has launched Wealthsimple Generation, a service for clients who deposit $500,000+ in their portfolio aiming to give them more personalized portfolios and access to on-demand financial planning. If, one day, banks are able to offer such tools within their platforms, it's likely HNWIs will give these a try.

Banks can profit from partnering with WealthTech startups, too. They can improve client stickiness for banks, retrieve new clients, and scale the accounts of HNWIs faster, which will increase their assets under management.

Develop a custom solution

Building a solution from scratch costs banks crazy amounts of money and time. Some of them even prefer buying an outsourcing company in order to reduce talent acquisition and onboarding time. Despite the fact that each large bank has its own wealth-management arm, putting this vehicle to work seems to leave them no room for new ideas and innovations.

Merrill Edge, which offers online investing, trading, and banking services, launched in 2010. This discount online brokerage was established by Bank of America Merrill Lynch to focus on clients with less than $250,000 in investments. Four years later, Merrill Edge referred 30,000 customers to Merrill Lynch, which converted into a few additional billion dollars to manage.

Also, Vanguard has its own robo advisor solution, Vanguard Personal Advisor Services, which was listed among the Best Robo Advisors for 2019 this May.

Acquire a startup

Buying a unicorn and making it part of the bank's ecosystem can help to expand the bank’s customer base and enhance client stickiness. However, not every startup is born to become the next big success, while their prices are high even for large banks. Also, there is no guarantee that other banks won’t copy the solution the very next day after the startup begins to succeed.

Such acquisitions are very rare, as the acquired companies have to be a perfect business fit with the bank. According to BankingTech, only two startups in WealthTech were recently acquired by banks—Honest Dollar (Goldman Sachs) and Gambit (BNP Paribas). Both are robo-advisors, while the latter claims to be AI-driven and mobile-first.

Some experts say that buying startups is the only way forward, as they’re usually led by people who are able to approach complex tasks and are fluent with the WealthTech domain. Acquisitions bring fresh thinking and talent to products and challenge existing WealthTech teams.

Invest and/or partner with a startup

This is the most common and low-risk strategy among banks at the moment. Before buying a startup, banks invest some money in it and integrate a white-labeled version with their ecosystem. Thus, they are able to see whether the startup improves the bank's performance and fits their business. Moreover, many banks invest in the same companies and use their solutions in parallel. There's a mutual benefit for both  sides— the bank's client stickiness increases while the startup enhances its client base and grows in price.

At the beginning of 2017, Morgan Stanley partnered with Addepar to help advisors see more of their wealthiest clients’ assets. Typically, HNWIs hold their assets in limited partnerships across a number of accounts. Such partnerships enable them to gather information from those various accounts in one place, and to quickly parse the data to answer individualized questions.

Unlike other WealthTech firms that are focused on selling to consumers directly, SigFig sells its tools primarily to financial services firms and banks. One can find Wells Fargo, UBS, and Citizens Bank among their partnership list.

iCapital Network, which is building modular alternative investment solutions, has followed this path as the world’s four largest banks —J.P. Morgan Chase, Credit Suisse, Morgan Stanley, and UBS — invested in the company in 2018. According to Business Insider, UBS manages the largest amount of private wealth, which totals $2,403 billion. Morgan Stanley’s wealth-management arm is closing the top three with $1 trillion AUM. Credit Suisse and J.P. Morgan Chase are following them with $792 billion and $526 billion in assets, respectively. All of them believe the partnership is going to empower their own arms with alternative investment offerings.

Certainly, however, partnerships between WealthTech solutions and banks entail their own struggles. For example, national laws and regulations are limiting robo-advising within banks to the country in which they’re registered. Also, banking experts often view WealthTech companies as enemies because they’re disrupting some of their offerings. Nevertheless, people demand digitization and that pushes banks to adapt to the new conditions.

Takeaways

Banks can harness tech powers to expand their HNWI offerings through partnering with WealthTech platforms. This strategy is not as expensive as buying a startup or building a product from scratch. At the same time, it provides the same huge benefits to both WealthTech companies and banks.

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Comments: (1)

Ambrish Parmar
Blog group founder
Ambrish Parmar - Digital Strategy and Transformation Director - London 02 June, 2019, 09:31Be the first to give this comment the thumbs up 0 likes

Hi Vasyl

Thank you for posting and sharing. I think this is a case of watch this space. Spot on with your observations. Ambrish - Community group founder.

Vasyl Soloshchuk

Vasyl Soloshchuk

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