Morgan Stanley, a Wall Street giant, is convinced that only a “handful” of roboadviser startups will survive. The CEO of the largest roboadviser startup agrees.
Roboadvisers provide financial advice or portfolio management online or via a smartphone application. Rather than using human managers to build portfolios, they use algorithms to determine where to invest.
Global assets managed by robos could reach $US13 trillion by 2025 in a best case scenario, according to a research note penned by a group of equity analysts at Morgan Stanley. That’s up from $US100 billion as of December 2016. However, according to the analysts, only a few roboadviser startups are going to make it. They predict most roboadvisers startups will merge with other startups, or be bought out by incumbent players looking to expand their digital footprint.
In a recent interview with Business Insider, Jon Stein, founder and CEO of Betterment, the largest independent roboadviser with $US9 billion in assets, said he agrees with the investment bank.
“It’s the way things have gone in every other industry and during every other cycle in this industry,” Stein said.
“How many big financial services brands have broken out in the last three decades?” he added.”It is very few.”
Morgan Stanley predicts that legacy firms such as Vanguard and Charles Schwab, which were some of the earliest incumbent players to get into robo, will eat up marketshare moving forward, not startups such as Betterment.
“[W]e think the incumbents are best positioned to win market share, and we see the fact that ~70% of the companies we interviewed either just launched or are about to launch such offering as a step in such direction,” the bank said.
Naturally, this is a point which Stein disagrees with. He thinks such firms, which to be sure manage trillions of dollars, are stuck in a different wealth-management “paradigm,” which will hurt them in the long-run and benefit Betterment.
On Morgan Stanley specifically, Stein had this to say:
“Morgan Stanley, for instance, is a firm set up to serve clients the old way. As a result, they are having a really hard time shifting to this new paradigm of pure customer alignment because that’s not their model. Their model is brokerage alignment. It is a brokerage model. They are there to sell you a product, whatever product makes them the most money. That tends to be the one that they favour.”
Morgan Stanley declined to comment on Stein’s comments. The Wall Street giant has taken many notable steps to digitize its wealth-management offerings. As Business Insider’s Matt Turner reported, the bank is planning to roll out a goals-based roboadviser option for the children of existing wealthy clients and for Morgan Stanley stock-plan participants.
Here are the relevant passages from the interview:
Chaparro: Morgan Stanley put out a big note on the future of fintech back in May in which they argued that “only a handful of roboadvice startups will survive.” Those that don’t survive will consolidate or be bought up by legacy firms. Do you think this is how things will play out?
Stein: It’s the way things have gone in every other industry and during every other cycle in this industry. So I expect that is right. That doesn’t mean there aren’t going to be new ideas coming out and new competitors emerging for decades to come.
But we have to ask ourselves: How many of these players can actually make it to scale? In financial services, it is not many. How many big financial services brands have broken out in the last three decades? It is very few. What’s the brand-new bank that has come along? There’s none. What’s the new investing firm that has broken out and taken a lot of share? There are a couple that I probably know of, but they’re not on the public’s radar. Maybe like Financial Engine or DFA.
There are a couple of firms that have gotten big, but they’re not a huge name. PayPal did it. Capital One did it. But it’s few. So I agree with their thesis: Few will survive, and there will be consolidation.
Chaparro: Incumbents have had their own robo offerings for years, and they have their big brand and infrastructure to back them up. What makes you so certain Betterment can survive up against such competition?
Stein: For the same reason why we often see those few innovators break out.
You could also ask “Why did Amazon break out and become the dominant online retailer?” — some would say dominant retailer period. And why wasn’t it Barnes and Nobles, Target, or Walmart, or anybody else? It is because Amazon has a specific focus. They didn’t have conflicts with a set of existing infrastructure and systems and people who were built around doing things the old way.
Morgan Stanley, for instance, is a firm set up to serve clients the old way. As a result, they are having a really hard time shifting to this new paradigm of pure customer alignment because that’s not their model. Their model is brokerage alignment. It is a brokerage model. They are there to sell you a product, whatever product makes them the most money. That tends to be the one that they favour.