asset management

ROBOADVISORS & INVESTING: Robinhood's latest $8bn valuation means that scale players need to wake up

There’s no such thing as a free lunch in life, but there are such things as free trades on Robinhood. What Chime did with banking, Robinhood has done with trading. Their massive 4 million active user base is enviable to every other Fintech. So then it's no surprise that the firm is estimated to be valued at $7-8 billion, following a $200 million fund raise with existing investors. Founded in 2013 by two former Stanford University roommates, Baiju Bhatt and Vlad Tenev, with the goal of  building a brokerage service that democratized access to the financial system -- specifically, stock trading and its significant barriers to entry (costs, fees, and minimum capital requirements). Since it's launch, millennial investors -- an elusive audience to traditional financial services firms -- have flocked to the service to trade stocks, options, cryptocurrencies and exchange-traded funds, at low-to-no fees.

Such success stems from the app's ability to earn fees via indirect channels such as marginal interest, lending, a $6 per month premium product called Robinhood Gold -- offering up to $1,000 of margin to trade with, and lastly, rebates from high-frequency trading and payment order flow. Here, third-party market makers, such as Citadel Securities, Two Sigma, and Virtu, pay Robinhood a rebate for processing trades on the app's behalf, apparently to offer better execution quality and prices. Whilst that sounds noble, it must not be forgotten that such a non-transparent practice -- as noted by CNBC -- could encourage brokers to send orders to market makers that offer the most generous rebates, and not necessarily the ones who offer the best prices for stocks. However, this is likely not to be the case as Robinhood's leadership has stressed that "we don’t take rebates into consideration when we choose which market maker will execute your orders. Also, all market makers with whom we work have the same rebate rate". Last year Bloomberg reported that Robinhood made in excess of 40 percent ($69 million) of its 2018 revenue from payment order flow.

Additionally, Robinhood is planning a U.K. launch to muscle-up against the likes of challenger broker Freetrade -- a London-based twin of Robinhood, and challenger bank Revolut -- who has indicated its intention to offer a free trading platform in the near future. The interesting aspect here is that Robinhood has been desperate to become a full-service bank, with evidence of this coming from last year when the company ended up with egg on its face after announcing its intentions to launch savings and checking accounts with 3% interest rates (30 times the U.S. national average) - despite not being FDIC insured (which is illegal). All too soon after this discovery was brought to regulator's attention, the product was rebranded as a "cash management program" and references to deposit protection were swiftly removed. Yet, the pursuit continues, as the company's second attempt has recently been made via an application for a bank charter in Push-to-Offer Traditional Banking Services with the Office of the Comptroller of the Currency (OCC).

Lastly, there are rumors that Robinhood is expecting a much bigger round of funding later this year, which could value the company at over $10 billion. This, coupled with the success of the company's latest commission-free crypto trading app, U.K. expansion, and launch of its full service bank, should make scale players in the industry such as Schwab, E-Trade, M1 Finance, and Fidelity fairly nervous. From zero-fee index funds, to zero-fee trading of single stocks. Fee-free trading apps like Robinhood, Vanguard, and FreeTrade have initiated a pricing war between scale players and themselves. So long as the strategy to fight this war remains: platforms and marketplaces who cross-sell products with the aim to retain customers and lock them into a sales cycle, this tech-enabled price war will squeeze margins down to zero. Last one to the bottom is a rotten egg.

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Source: Robo-Advisors with the most AUM (via Roboadvisorpros)

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Source: Robinhood (via Bloomberg), Robinhood Gold (Robinhood Blog), CNBC (article), Robinhood Crypto (Robinhood Blog)

ROBO ADVISORS: Robo-advisors are winning but leaving cash on the table

We will keep this brief. In a recently updated, “Robo-Advisors with the Most AUM” the top 5 robo-advisors, consisting of three Fintechs and two Incumbents, remained in the same position as last year, although each of them have seen gains in Assets Under Management (AUM) and the number of accounts. Yet, the jury is out as to whether gathering assets or gathering users are good measures of success -- we wrote about it here.

A lot of digital wealth management innovation targets people who have been excluded from the traditional wealth management business because the amounts they have to invest are too small for the economics of traditional wealth management to work. So the strategy is to target this opportunity by getting to the consumer, earn them loyalty with at least one good service, perhaps free, and then lock them into a full financial services relationship. The expected outcome of this is to see a reduction in the number of these individuals and/or the assets they hold -- Unadvised assets - the liquid cash in real wallets and check & savings accounts.

Daily fintech's Efi Pylarinou, has done the heavy lifting on this, finding unadvised assets in the US, EU, and UK to be around $14.5 trillion, $13.7 trillion, and $3 trillion respectively. Surprisingly, each of these on average have experienced growth of 9% over the past 3 years. Such findings point to the fact that, since their inception, robo-advisors have had none or a negligible impact on unadvised assets. Although unadvised assets are impacted by all innovations in Fintech, robo-advisors are more likely to be the ones that incentivise you to split up with your cash to some degree in hopes of generating returns with very little friction/costs. And if this is a direct result of trends in monetary policy, public markets, and human behavior superseding the digitization of capital markets, when should we expect the reversal to occur?

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Source: Robo-Advisors with the most AUM (via Roboadvisorpros)

FINTECH: SoFi, Square and Twitter as the Horsemen of the Fintech Apocalypse

SoFi has thrown two bricks through the window of the finance industry this week. The first is a set of no-fee Exchange Traded Funds (ETFs) to be distributed through its proprietary roboadvisor and third party brokers like Fidelity and Schwab. SoFi is the second meaningful institution -- after Fidelity -- to price beta exposure to public markets at zero. We think back to Napster and the collapse of music prices to zero as distribution channels shifted from (a) buying records to (b) "piracy", i.e., kids trading songs with each other on the web. It's not that the cost of manufacturing the song, or the ETF, is nothing. Rather, when distributed to millions of users, the fixed cost trends towards nothing and the variable cost is de-minimis.

The business model implication for Music was to give away the very core offering, and to charge for t-shirst, concerts, and the convenience of using Spotify's neat interface. The business model implication for investment management is to give away the very core offering, and to charge for asset allocation, planning, and a subscription to an easy-to-use financial services bundle. There is more to be said about hiding monetization, about making it hard to see and quantify. Arguably, Google, Facebook and the other web companies have made this trade-off opaque; we get the core offering for free, and pay invisible, unfelt things that aggregate into monstrous compromises. Similar dangers lurk here -- from Robinhood's liquidity selling to algo traders to Fidelity's "infrastructure fee" of 15 bps to mutual funds on its brokerage shelf. Money will be made somewhere, and as a mere human consumer, you likely won't see how.

The second brick from SoFi is an agreement with Coinbase to power SoFi Invest's crypto currency trading within the lender's digital app. Targeting Robinhood and Revolut with this move, SoFi is delivering on the vision of a broad cross-sell of financial products to a captive Milliennial audience. Coinbase needs the trading, as its revenue is highly correlated with crypto asset prices. The exchange has been fairly indiscriminately listing coins, like the divisive Ripple XRP, to get its 2017 groove back. Maybe the rumored Facebook coin will do the trick. What we want to point out further is that the CEO of SoFi is the former COO of Twitter. Jack Dorsey, the CEO of Twitter and Square is a well-advertised Bitcoin and Lightning network supporter. Square controls Cash, the most popular (sorry Venmo) peer-to-peer money movement app in the United States. In 2018, the app facilitated $166 million of Bitcoin sales. These bits of data tell us one thing -- SoFi, Twitter and Square share a fact base, institutional talent overlap, and a likely vision for the future.

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Source: SoFi ETFs (Wealth ManagementFinancial Planning), WSJ (Fidelity), NY Times (Facebook), Motley Fool (Venmo vs Cash)

2018 FINTECH PREDICTION IN REVIEW: Crypto Eighteen

Here's what we said would matter in the past year year:

If you thought 2017 was loud about crypto, just wait till 2018. Up or down, that doesn’t matter — what will certainly be in play is massive volatility as the crypto economy beats on against traditional finance, regulators and sovereign power. The largest mountains to climb are the development of institutional crypto custody and a vanilla ETF product to absorb the splurging demand, and we think this will happen. In terms of creative destruction, we expect one of the top ten 2017 currencies to collapse 80%, one of the enterprise blockchain consortia to fall apart. New technical solutions like the Tangle or Hashgraph to challenge our assumption that Bitcoin is the endgame.

How did we do? Pretty well overall. We predicted massive volatility and we got it. The massive market capitalizations of 2017, rounding up to $1 trillion, have deflated down to $100 billion and change. Many assets melted 80%+, but we will call out Bitcoin Cash specifically, which fell from $40 billion to less than $3 billion after yet another rough fork at the end of the year. On the other extreme, EOS raised $4 billion in ICO funds. New smart contract platforms indeed came to market – from EOS to Hashgraph to Dfinity – but Bitcoin dominance has stayed fairly flat at 40-60%. 

The negotiation against incumbent sovereigns and traditional banking moves forward; regulators across the world have placed many 2017 digital assets in a regulated “securities” bucket, with enforcement actions starting to target individuals and exchanges. At the same time, institutions like Fidelity have launched crypto custody divisions, the NYSE is launching crypto exchange Bakkt, and the number of enterprise players in the space has grown like weeds. While no ETF was launched due to SEC concerns around market maturity, an Exchange Traded Product did launch in Switzerland using VanEck index data.

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Source: 2018 Keystone Predictions Deck, Coinmarketcap (total capitalization, % BTC dominance), Fidelity, Amun ETP, Bakkt via ICE/NYSE

ROBO ADVISOR: BlackRock's $120 million buy of Envestnet stock and Morgan Stanley's platform

We believe that most financial industry incumbents deeply misunderstand and miscategorize Fintech startups and their innovations. They think the small size of a particular roboadvisor at some time X, or the number of accounts of a particular neobank at time Y, hold any meaningful information about the future. The truth is that most of the consumer Fintech symptoms are telling you what the underlying cause -- digitization -- doing to your industry. In the case of investment management, the outcome is a re-forming of consumer preferences, which then gets reflected in the pricing of solutions (50 bps), which then require entirely new products and value chains within a digital chassis (hey there 6 bps SPDRs).

Case in point. BlackRock, which had paid $150 million for FutureAdvisor, as well as invested in European robo Scalable Capital, has now bought $120 million in public equity of turnkey asset management platform Envestnet. In the same turn, Morgan Stanley has praised a deployment of a BlackRock-powered digital wealth desktop dashboard, rolled out to 15,000 front office advisors, as a "4-year head start" versus competitors. While that's not factually true -- many other great wealth platforms exist -- it does show that finally investment distribution firms understand the operating efficiency of digital-native solutions. 

Watch carefully also what this does to asset managers, i.e., fund manufacturers. In order to get into client portfolios, which are mostly intermediated in the US, they provide technology solutions to the intermediaries, nudging the intermediaries towards their proprietary investment products. That's not nefarious, just surprising that the best way to sell iShares is to give Morgan Stanley some high quality roboadvice software.

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Source: SWFI Institute (BlackRock), Financial Planning (BlackRock), Morgan Stanley (wealth screens)

ROBO ADVISOR: $40 Billion Per Month Goes from Active to Passive, But Robo Performance Mixed.

One part of the digital investment management story is the shortening of the value chain in wealth and asset management. As active asset managers (fund manufacturers that pick investments to create alpha) face compression driven by asset flows into passive products -- indexes packaged in ETFs -- one answer form asset managers have been to build out their own distribution channel, where they control asset allocations. This is why roboadvisors have primarily gained traction with manufacturers (revenue sale) and not distributors (efficiency sale). So let's highlight a few relevant data points.

First, Autonomous asset management analyst Patrick Davitt just put together our October sector data, which is highlighted below. Looking at over 9,200 active funds and $9.3 trillion in assets, a full 63% under-performed their benchmark in October. Out-performance in a down-market is supposed to be the reason active management exists! As for 2017, there was a 50% chance of out-performance, a coin flip on whether it's better to hold an active fund or just the index. In terms of actual assets, regardless of market environment, about $20-40 billion is flowing out of active funds and into passive funds. Hard to find a more clear example of a secular shift. Part of this story of course isn't fair to fund managers. When bad things happen in an active fund, you can blame and fire the fund; but in a passive index, you blame the market and hope it recovers. This is a permanent, psychological disadvantage.

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The second part of the story is the fantastic Backend Benchmarking Robo Report (link below). The analysis follows the performance of 24 roboadvisors, with several over a 2 year horizon, which we partly highlight. Notably -- Merrill, TIAA, Zack's and Morgan Stanley are all listed as incumbent robos. Our estimate of $600 billion in the strategy feels increasingly correct. In the charts below you'll see 2 treatments of the data: (1) annualized returns vs standard deviation, sized by Sharpe ratio and colored by incumbent/startup status; and (2) an upside and downside capture ratio plot, which shows how good an allocation is at capturing alpha during market momentum. In the first analysis, incumbents like FidelityGo and Vanguard look stronger than the independents in terms of the unit of return per unit of volatility. In the capture category, TD Ameritrade, Personal Capital and Wealthfront stand out. Merrill Edge is the worst on capture, and FutureAdvisor has the worst 2-year performance. What's most telling perhaps is that 77% under-performed their benchmark (as set by this third party) in Q3, and 82% under-performed over a 2 year period. Hard to fire the whole market.

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Source: The Robo Report (download here), Autonomous NEXT (robo AUM), Autonomous Research (flow data)

ROBO ADVISOR: Are robos managing $1 trillion of digital wealth yet?

The center of gravity for digital wealth in the US is the In|Vest conference, and the update this week from its publishers is excellent. Let's call attention to the following phenomenon. All of a sudden, everyone wants to claim to have roboadvisor / digital wealth assets, and to get rewarded from a valuation perspective for understanding the future customer. As soon as JP Morgan started bragging about its YouInvest free trading app to compete with Robinhood and Schwab, Bank of America released an update on how much asset under management sit inside of Merrill Edge, its online investing division, and its digital strategy. So here are a few interesting numbers on the size of the robo market, broadly speaking. 

For incumbents, Merrill Edge now has $200 billion in assets under management. This is, end of the day, the small client channel. But after combination with Bank of America, Merrill gained a retail footprint in the form of bank branches. The firm is planning to put 600 new investment centers into those branches by 2020, for an omni-channel digital client experience. Another examples is Ric Edelman's post-merger mega RIA, composed of Edelman Financial, Financial Engines (formerly FNGN, the original 401k roboadvisor), and the retail footprint of the Mutual Fund Store. That's $176 billion in AUM, plus 125 physical locations, plus Ric's own $15+ billion. Let's add to that Schwab ($33 billion) and Vanguard ($112 billion). Fidelity, TD Ameritrade, Capital One Investing and others also have a similar service, so let's round that up to $10 billion generously.

On the disruptor side, we have Betterment ($15 billion), Wealthfront ($11.3 billion), Personal Capital ($8 billion) with the most assets, and maybe another $3 billion from players like SoFi, WiseBanyan and the others. Let's be kind and say micro-investing services (Acorns, Stash Invest and the rest) have $2 billion between them. That's not a knock -- those apps have millions of users, but they don't optimize for AUM. For good measure, let's throw Coinbase into the mix as well, with $20 billion in custodied crypto assets managed in a digital app. The tough part remaining is the B2B2C players in the form of SigFig, AdvisorEngine, Jemstep, FutureAdvisor, Trizic and Envestnet. We'd be willing to bet on $50 billion in total true digital delivery. Sum all that up, and we get to $650 billion. Now, these are very loose definitions. You could still add in (1) quite a bit in asset allocated crypto assets, (2) the Asian fintech digital investing numbers (e.g., Ant Financial), (3) the digital bank arms of the Europeans (e.g., BBVA, Nordea) and then get pretty close to a trillion. Do we still think roboadvice is a failing theme? 

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ROBO ADVISOR: JP Morgan plans to starve Robinhood (and all other Fintech) of Oxygen

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JPMorgan is taking on fintech unicorn Robinhood. The bank is launching a service branded You Invest, directed at their 47 million digital/online banking clients, which includes (1) 100 free trades/year, $2.95 thereafter, (2) free investment research, (3) unlimited free trades if a Chase Private client (typically $100k in holdings), (4) portfolio construction tools, (5) and following up with a roboadvisor in January. This comes on the heels of its announcement of Finn, the mobile-first neobank for its customers, which preempts Revolut and Monzo from doing too much damage in the States. Sounds like a bunch of proprietary Fintech offerings, all priced to blow up the venture capitalists.

And JP Morgan isn't the only one. Remember, Fidelity just recently launched an ETF that costs 0 bps in management fees.  They can afford to do this the same way that Schwab can give roboadvice away for free -- bundling. If the firm doesn't make money on investments, it still has cash sweep; or if it doesn't have commissions, it has assets under management; or if it gives away the core, it can still charge you for satellite. Such mega-banks with diversified business lines are going to fight Fintech companies by starving them of oxygen. It is essentially reversing the strategy of the unbundling Fintechs, who use venture capital funds to price undercut incumbents. But in this case, the incumbent copies an innovation and gives it away for free.

The competitive response from the start-ups has been to also rebundle. FinancialPlanning.com calls this the "super robo". See for example microinvesting app Acorns, partnered with PayPal, offering its 1mm+ users a debit card with a checking account. Or look to SoFi, a student lender with roboadvice and insurance offerings. Over the pond, German neobank N26 has every permutation of financial product a Millennial may want to buy on their phone. All these firms will need to have payments, savings, wealth, and insurance under one roof, powered by artificial intelligence, customized to perfection. Can they outspend JP Morgan's $10 billion per year? And did we mention that Bank of America, Wells Fargo and Citi are in the game too?
 

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Source: JP Morgan (CNBC), Financial Planning (Super robo)

ROBO ADVISOR: Digital Drives Fidelity Fund Prices to $0, Morgan Stanley to Pay Advisors for Digital Engagement.

Roboadvisors have failed, you say. Hedgeable is closing down. Robos barely made a dent in assets under management -- crossing $200 billion, as compared to the full market of $40 trillion in US wealth management, or even when compared to the $3 trillion of assets that sit with independent RIAs. Further, when looking at where those assets sit, Schwab and Vanguard hold the lion's share, with the top 3 independent B2C contenders floating at $10-15 billion each. Well, not so fast. First, we point you to a great report from Backend Benchmarking on the space, which shows that from a pricing and features perspective, the fintech startups are still doing a great job. Betterment and SigFig each are eclipsed only by Vanguard out of incumbents, while still holding on to the capacity for quick innovation, thereby defining the path of the maket.

Second, companies like Morgan Stanley are fairly desperate to implement digital wealth in existing client books. The wirehouse just launched its digital tools -- goal based financial planning and account aggregation (i.e., Personal Capital in 2012). To incentivize advisor adoption, the firm is increasing payouts to advisors by up to 3% if clients use the software tools that show external assets, and leverage internal banking and lending products. The latter part is Wealthfront's and SoFi's playbook. Imitation is the sincerest form of flattery. From a broader perspective, remember the recent mega deal: Financial Engines acquired by a private equity firm for $3 billion, merged with Rick Edelman's massive RIA, distributed through the footprint of the Mutual Fund store. All of this is digital wealth.

As a final symptom, we leave you with Fidelity. As Autonomous analyst Patrick Davitt highlighted earlier this week, Fidelity will (1) offer free self-indexed mutual funds to their brokerage clients, (2) eliminate minimums to open a brokerage account, competing with Robinhood, (3) eliminate account and money movement fees, (4) remove minimum asset thresholds on Fidelity mutual funds and 529 plans, and (5) reduce and simplify pricing on its index mutual fund product suite. On the latter, the average asset-weighted annual expense across Fidelity’s stock and bond index fund lineup will decrease by 35%, with funds as low as 1.5bps. But to say it again -- Fidelity is rolling out index mutual funds with a $0 price. That's a price that works in a digital wealth offering.
 

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Source: Roboadvisors (Daily FintechThe Robo Report), WSJ (Morgan Stanley), Bloomberg (Fidelity), Think Advisor (HedgeableEdelman), Morgan Stanley (GPS Screenshot)

BLOCKCHAIN: Circular references in Crypto markets as exchanges: Binance and Huobi launch new ecosystem funds

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Towards the end of last year, we noted that there was a circularity in the crypto, private and public markets. Large ICO launches were inspiring private companies to follow as well (e.g., Kik), public companies changed their names to blockchain pretenders (e.g, Long Island Ice/Chain), crypto companies pointed to this as progress and Bitcoin went up. It wasn't purposeful market manipulation, but a hype cycle reverberating in a small room. What we're seeing now is, well, kind of worse.

Tezos raised $232 million when the price of Ether was about 50% or less than it is today, so about $500 million now. The result is a lot of lawsuits, no product, and the formation of a $50 million venture fund. Binance raised $15 million through its ICO, which now trades at over $2 billion. The exchange is launching a $1 billion venture fund. Huobi raised $300 million, and though the token trades at a discount, it is also launching a $93 million venture fund. EOS, the largest ICO ever at $4 billion, is committing $1 billion to venture through partners like Galaxy Digital. Another example stuck out at us from a recent Coindesk article, where Meltem Demirors described this cycle -- "[Blockchain Capital invests in Ripple, which owns XRP currency]. Ripple took some of that XRP and gave it back to Blockchain Capital. Blockchain Capital then turns around and invests it in Coinbase ... Coinbase now created a venture fund investing in startups Blockchain Capital is also investing in, who are then turning around and investing in startups with ICOs."

This is billions and billions of capital that were invested for one purpose -- to help the fund-raising team build software products that investors want to use -- that are being re-purposed into another direction entirely. Hey, maybe you hired me to program this website, but I decided manage your retirement portfolio instead. One result is a skill mismatch: lucky coders are not professional investors. Another result is the loss of focus. And the last is the systemic risk to the whole ecosystem. If the investment returns are based on financial engineering and memes, rather than some real economic activity to underpin our excitement, then a regulator pulling hard on one thread will unwind the entire experiment.

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Source: ICOs (Binance ICOHuobi), Venture funds (TezosBinanceHuobiEOS), Coindesk (Quote)

ROBO ADVISOR: Investment Management Fees Approach $0

Source: Fidelity

Source: Fidelity

Is automation finally catching up with the traditional investment management industry? A few data points say yes. First, Fidelity has unveiled the Fidelity Flex funds, which have management fees of ... you guessed it ... zero basis points. While there is a catch (these funds have to be held in Fidelity managed accounts), there is also pretty good exposure to asset classes. From bonds, to money market, to real estate, to small cap, the marginal cost of putting money into getting beta index exposure is nothing. As context, Fidelity's roboadvisor costs 35 basis points, while its human advisors cost 160 basis points. Same allocation we presume. Hmm.

Second, roboadvisor WiseBanyan has 30,000 clients and about $150 million in assets under management. Not a large business, but one that has good engagement with its customers and just raised $6.6 million. As a reminder, FutureAdvisor was sold to BlackRock for $140 million when they had about $700 million under management. And ... you guessed it .. WiseBanyan charges 0 basis points for financial advice. We don't have to remind you about fee-free trading from Robinhood for stocks and cryptocurrencies, their 5 million users, and $5 billion valuation

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Two observations from this information. First, free is not a business! Unless you sell the data to someone who cares, or you upsell another product. And the latter is exactly what is happening all across Fintech. Investment Management is a loss-leader for other banking or insurance services. See for example, Stash partnering with Green Dot to offer banking accounts, or Goldman's digital lender Marcus moving into savings, or any of the other players (Acorns/Paypal, SoFi, Transferwise, Revolut, N26, etc). So the strategy is to get to the Millennial consumer, earn loyalty with at least one good service, perhaps free, and then lock them into a full financial services relationship. Sounds hard!

The other point is that some firms seem to be quite disconnected from this reality. For example UBS and SigFig have been working on an American roboadvisor for several years, just now launching UBS Advice Advantage. Strangely, UBS already has a platform in Europe called UBS SmartWealth. Two brands, two technology stacks, same market. This signals that there are still underlying legacy systems that require bespoke integrations. And second, the Advice Advantage product is priced at 75 bps, which is a price that reflects cost of manufacturing, distribution, and a line item for profit. Does the UBS roboadvisor have enough of an audience to build in that profit? Does it provide enough value to deserve it?

CRYPTO: $34 Million for Hacked Exchange

Source: Coincheck

Source: Coincheck

Bloomberg picked up our note last week about how crypto exchanges are taking sky-high fees to list tokens and altcoins. Looks like the traditional finance world is noticing too. First, the Gibraltar Stock Exchange has a platform called the Gibraltar Blockchain Exchange (that’s why some many startups were jurisdiction-shopping Gibraltar!) that has a standardized ICO process with disclosure and vesting baked in. For a more open version, see Messari. There are multiple efforts from the capital markets as well as legal community to create such standards, but so far nothing has stuck. Some ICOs still just list on a website, others go through a SAFT, and yet others are shopped around by investment banks. Perhaps a defined path to liquidity can motivate some best practice.

Second, TMX, the operator of the Toronto Stock Exchange is working with Paycase Financial to launch a Bitcoin and Ethereum trading desk. This will be a regulated broker/dealer under Canadian regulations, launched in the second half of 2018, and (we expect) would offer a more direct ownership structure of the underlying asset than the CBOE/CME futures product. Reminds us of Exante in Europe. Maybe with this in place, someone can finally build at ETF? Further, the Canadian ecosystem seems to be quite forward thinking in its approach to blockchain. Though last year’s bungled attempt by the Tapscotts (due to misrepresentation) to launch a public vehicle holding $100 million for crypto investingdid take a toll on reputation.

And third, Monex Group (not the American Monex) is cutting a $34 million check to buy Coincheck. Yes, that Coincheck -- the one that lost $500 million of NEM tokens earlier this year. While this is a far cry from the Poloniex acquisition, it’s still real capital from a publicly traded financial institution. Maybe the largest financial institutions are not impressed with the tech behind crypto exchanges given limited speed, scale, and liquidity, but we think the revenues are too tempting to pass up for the middle market. It’s a land-grab, and the risk-takers will get there first.

ROBO ADVISOR: Roboadvice B2C and Incumbent Collision

Source:  Betterment ,  Raisin

Source: BettermentRaisin

We’ve long said that the digital wealth is finished. We don’t mean that it is dead, or that it’s fully adopted by the customer, or that the startups won (they haven’t). What we do mean is that the answer is fully known, and it is only time that will move us along the adoption curve for a solution that is now permanently part of the wealth management process. We have two data points on this from last week — Betterment and Vanguard.

In the latter case, Vanguard is partnering with German fintech company Raisin, which has 100,000 customers and €5b in assets. Raisin wasn’t yet an investment platform, but instead an international banking app. We’ll be self-indulgent and call it a neobank, one that integrates with savings products across Europe and allows customers to pick the best interest rate. The accounts are insured, and the financial institutions underneath are nothing more than widget manufacturers. This is bank-as-a-service, and we expect to see more of such apps after PSD2 is fully adopted. With the Vanguard partnership, the company will be adding roboadvisor capabilities built out of ETFs. Completing a financial product suite in such a way has been also done by N26SoFi, and other fintechs that have customers but not enough revenue. So which roboadvisor wins here—startup or incumbent?

And the other example of how the lines are blurring and digital wealth is just wealth management, is Betterment. The company announced several features last week which suggest a re-engineering if some of its asset allocation and trading systems. At the B2C end, the firm is allowing its larger customers ($100k+) to tweak portfolio parameters while retaining the other benefits of the automated portfolio. This is useful for creating the impression of value (and price differentiation), as well as battle the perception that B2C robos are commoditized. But more importantly, this architecture change likely stems from the financial advisor side of the business. Betterment had an early lead in their advisor channel as a robo-TAMP (turnkey asset management platform), and was particularly effective with advisors that wanted to outsource their investment management. But, it’s capability was narrow — a channel for millennials rather than a digitization strategy. Companies like SigFig, FutureAdvisor, AdvisorEngine* and Jemstep have all been more advisor-accommodating. The new change allows advisors to tweak asset allocations. That is a "give" to traditional financial firms and their approach.

Source:  Betterment ,  Raisin

Source: BettermentRaisin

In each of these examples, a small step is taken towards the collision of different solutions into the same thing. Digital wealth is complete—we can see what it looks like in Raisin, in Betterment, at Vanguard, at Merrill Edge, at UBS, and Fidelity and many others. Independent advisors can rent the exact same thing for their clients too. And on the broader scale, we see not just digital wealth, but personal digital finance getting glued together into what may eventually resemble WeChat. A Frankenstein of payments, savings, investments (traditional and crypto), and retirement, with an overlayed AI financial assistant doing your bidding. This ain’t bad at all for the customer, but probably not so great for the robo venture investor.

BLOCKCHAIN: Crypto Index Fund from Coinbase still not ETF

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One of our key predictions for 2018 was the rise of vanilla investment product packages for digital assets. That means we would get to see ETFs and boring-old portfolios, rather than the wild contortions of 2017, where public companies pretended to always be into blockchain to get a crypto halo. And in large part, we put the responsibility for irresponsible retail investment behavior squarely at the feet of American regulators. Instead of a 5 bps ETF with some crypto exposure, we continue to see coin mania and sentiment-driven speculation. 

Coinbase is not standing still, and has announced a subsidiary called Coinbase Asset Management that will oversee a Coinbase Index Fund. While Coinbase has never been one to list a lot of assets, it is disappointing to only see 4 crypto currencies (BTC, ETH, BCH, LTC) in the package. Not to mention that this product comes with a $10,000 minimum and a 2% annual management fee. Looking at crypto assets, 2% may not sound like much given 1000% returns last year. Looking at digital investment management, 2% sounds like 10 times the price of the entire Betterment service. That price is expensive and inefficient, and is another reason why we need an ETF structure.

Last, investors have a track record of experience with the Bitcoin Investment Trust structure (about $2 billion of GBTC), which shows some of the disconnect between holding a crypto asset directly, versus through a wrapper. The wrapper can trade at a discount or a premium to the actual assets it holds. Below you can see that depending on the time period, you would have had quite different return profiles investing in Bitcoin directly versus the investment trust. And at times, you would be buying the fund where the net asset value was 20-30% higher than the value of the holdings in it. The solution for better pricing is more liquidity, not less, and lower fees, not higher.

Source: Autonomous NEXT analysis, Coinmarketcap, Yahoo

Source: Autonomous NEXT analysis, Coinmarketcap, Yahoo

ROBO ADVISOR: The Flipside of Digital Wealth

Source: Finance Magnates

Source: Finance Magnates

The path of digital investment advice is going according to plan. We (with big help from Patrick Davitt @Autonomous) predicted digital wealth to grow to between $500MM-$1.5T in AUM by 2020 in the Fintech Phenomenon analysis, and the latest estimates from Cerulli place is at $220 billion today. Of course most of that is Vanguard, Schwab and other incumbents, which was also expected given the product set and the customer acquisition dynamics in place. But guess what! Roboadvice as a theme is already integrated into the asset management ecosystem and you are too late. So what's next? Well, that depends who you are.

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If you are an incumbent, then there is a desperate rush to build artificial intelligence into the investment management product. This is hard, but you can see the investment dollars being poured into the space. For examples, look to Man Group saying to adopt big data or be "eaten alive" (by what? computers or something?), JP Morgan copying BlackRock in creating a quantamental / equity data science unity within its asset management business, and Wells Fargo augmenting research analysts with AI. To see how bankers think about this AI augmentation, see this article on the use of AI at BAML. Augmentation is giving the power of automated human judgment at scale, backed by data, to humans who can apply it on particular fact patterns. More simply, it's letting AI do the first draft, and then having people finish the work.

Source: Bloomberg

Source: Bloomberg

If you are a consumer-facing fintech startup, then you probably gave up on roboadvice a while back (except for the top 3 or so). Instead, some companies have scaled massively by finding a very concrete paint point and creatin well-designed relief. See SoFi with student loan refinancing, Robinhood with mobile-first stock trading, Acorns with automated savings. In each case, the pain point is immediate and specific -- save $5k on student debt now, buy AAPL without paying $10 now, save $100 this month starting now. But these businesses are too narrow to fill out their current unicorn valuations. So they must broaden. Thus SoFi is going to offer checking accounts (without a banking license, ha!) in the spring. And Robinhood is following neobank Revolut into offering crypto trading on its trading platform.

That makes sense -- compete where traditional finance can't. See how Nordea bank is forbidding employees from trading Bitcoin, or how Vanguard refuses to launch a Bitcoin ETF. We have you on the record Mr. Buckley!

But it doesn't always work out. For example, Stripe is subtracting rather than adding. They were one of the first payments companies to accept Bitcoin payments, but are planning to remove Bitcoin due to slow transaction times and expensive fees. That's been a byproduct of the investment rush, and could be later solved by something like Lightning. But, you know, they say they might use Lumens instead, a crypto coin with the former Stripe CTO on its board. We've already written about rent seeking before, so we'll keep the finger wagging out of this one.

FINTECH: Digitization of All Asset Classes

Source: Roofstock

Source: Roofstock

So here's the good news. While we wait for blockchain to change the infrastructure of financial services, amazing things are constantly happening across the financial front office. The Fintech change is really here and we can see it -- especially if we look past cashflow and to customer experience. Using last decade's innovation of mobile and web, platforms have created access to previously expensive financial products. Digitization has led to the democratization of each and every asset class.

Here are a few data points, more of which you can always find in the body of the full email. First, digital lending -- 2017 saw increasing online lending activity. Even companies like Goldman Sachs are boasting about $2 billions of loans originated and $5 billion of deposits in their Marcus platform. That's Goldman, not Lending Club, but the consumer shouldn't care. The other side of the balance sheet, neobanks, are also maturing and growing their offering.Revolut has added insurance to its product portfolio, as did SoFi and N26 earlier. Monzo is opening up current accounts, while Tandem gets its banking license after buying Harrods. Such European startups have over a millions of eager users, which is why a $45 million check just went into an American neobank called Varo.

In digital wealth, Vanguard peaked over $100 billion in AuM, and the hybrid roboadvisor platforms (those where a human and algorithms are combined) are booming. Venture investors keep pouring money into the combination of traditional and digital -- see for example NextCapital's $30 million round. Access to and manufacturing of alternative investment products is moving along too. Real estate marketplace RoofStock gets a $42 million funding round on $1 billion transactions moving through its platform. And Wealthforge, a private offerings platform announced more than $500 million in investments processed. Insurance is not far behind -- take of example how insurtech Betterview used drones and machine vision to assess damage for claims during hurricane Irma.

Source: Betterview

Source: Betterview

Source: AdvisorEngine

Source: AdvisorEngine

So this is Fintech -- multifaceted, difficult, working with industry to impact the most people possible. Access and democratization are its core values, even if it is not decentralized nor truly disruptive. For the Crypto movement to have the most impact, it needs to retain this driving spirit to create services that help all people access better financial services to live better lives.

ROBO ADVISOR: Game Over for Equities?

Source: State Street

Source: State Street

Let's land the ship in traditional equity markets. Josh Brown of Ritholtz Wealth Management summarizedthis development as "Game Over". State Street announced a new line-up of prices and names for its SPDR ETF family, which you can see in the graphic below. The average expense ratio shifted from 16 basis points to 6 basis points, a 65% decrease in cost for exposures to nearly any asset class for the regular investor. We have long been saying that industry digitization leads to revenue collapse in the short term as products become more automated. Think about music industry revenue falling 50% since the early 2000s, the retail industry owned nearly 50% by the online retailer Amazon, and roboadvice creating a wealth management price point at 25 bps instead of 150 bps. Here we are with investment management.

Not surprisingly, asset managers are shifting down the value chain from manufacturing financial product to building technology solutions for financial advisors. We discussed BlackRock's digital wealth strategy last week. Competition to gain market share and drive the cost of delivering financial advice is accelerating. This week we want to also highlight one way of mismanaging such acceleration. TD Ameritrade announced that it was refreshing its ETF Center for financial advisors with the SPDR line up, an in the process removing iShares and Vanguard alternatives from the no-transaction-fee line up

Here's why this matters. TD Ameritrade is a custodian, and holds hundreds of billions of assets overseen by independent financial advisors. It also has several partnerships with private-labeled roboadvisor technology providers, like SigFig, FutureAdvisor and AdvisorEngine. This software is used by advisors to deliver automated asset allocations for their smaller clients, which can only be done using no-transaction-fee ("NTF") instruments, otherwise the commissions from trading would destroy any gains on small portfolios. But of course, it's hard for a broker to make no revenue at all from these assets, which were mostly in Vanguard and iShares allocations. Michael Kitces, an industry consultant, suggests that State Street is paying for that NTF shelf space in a way that the other fund companies were not. The downside is that now the financial advisors have to rebuild their allocations with new products, and trigger capital gains for clients when rebalancing from Vanguard to State Street. Oops.

CROWDFUNDING: Over 100 Crypto Hedge Funds, Over $3B in ICOs

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The crypto economy is moving faster and faster across regulation, assets and new financial ecosystems. We spent much of last week trying to update our understanding of where everything stands on October 2017. Here are a few key data points. First, we have been tracking token launches since the Token Mania ICO report in July, with the criteria that the ICO must have already raised the capital and that the total raised is greater than $1 million in USD equivalent.

Our current figure up to date is $3.04 billion. The underlying data sources leverage multiple ICO trackers -- ICO StatsCoindeskICO Alert, ICO DataToken MarketToken Data, Smith+Crown, and others.  In the chart below, you can see the additional context, which is quite sobering. We pulled total Bitcoin and Blockchain funding, updating our Fintech Phenomenon charts, from independent and corporate venture capital since 2013 globally. It is hard not to conclude that the market has shifted considerably from Enterprise blockchain to the public chains in terms of committed resources (even if you assume 50% of 2017 ICOs are scams). This data was used by CNBC in Wall Street veterans are trickling into digital asset management to highlight the platform shift.

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A similar story can be seen in the inception dates of crypto funds. We continue to build out a database of crypto hedge funds, which follow one of the following strategies: (1) liquid venture investing in tokens, (2) cryptocurrency traders and former hedge fund managers, (3) token baskets, akin to software fund-of-funds, (4) crypto-indexes and (5) artificially intelligent or automated bot funds. For now, we exclude investment vehicles built by traditional asset managers that package exposure to a single currency, such as the Bitcoin Investment Trust from DGC/Grayscale. While data visibility in this space is quite poor, and not all "funds" are actually funds, we are able to piece together a fairly coherent story about what is happening. Our current view is that 75%+ of these funds were started in 2017, that in total they manage between $2 and $3 billion, but aspire to manage $8 billion, and that size is concentrated among the few early movers like Pantera and Polychain. You can see this data used by Reuters and CNBC. Please email us or tweet at us if you'd like your firm added. 

FINTECH: Alibaba $15 Billion for AI, IoT and Fintech Research

Source: Kakaobank,  Counterpoint Research

Source: Kakaobank, Counterpoint Research

Banks have sticky customers and large competitive moats, right? How long will that last in an artificial intelligence first world? Here are 3 data points. First, Alibaba is spending $15 billion to build a research and development program that they see as the future of financial services. It will have hubs in Beijing, Hangzhou, San Mateo, Bellevue, Moscow, Tel Aviv and Singapore. This will give the company access to a diverse talent pool and build a path out of China to the global market. The areas of research are artificial intelligence, Internet of Things (IoT), Fintech, quantum computing, and human-machine interaction. Sound familiar? Putting that into context, JP Morgan spends $7 to $9.5 billion on IT per year (depending on how you cut the data), with a fraction for Fintech and not mere maintenance. That's as good as it gets for what American financial firms can do.

Is it a big deal if an attention economy firm like Alibaba builds AI and Fintech capability? Here's a narrow example in Korea. KakaoBank is a mobile-first bank that was championed by messaging platform KakatoTalk, which has 42 million users. The bank opened 300,000 accounts in 24 hours of launch this past July, and reportedly has 45% share of all new opened bank accounts in the country since then. That's better neobank traction than Monzo, Tandem, Simple and Revolut combined. Similarly, Ant Financial and Tencent are using their chat platforms to scale some of the world's largest money market funds. What happens after putting $15 billion and AI-powered virtual assistants behind this strategy?

Here is the other boundary of this strategic vector. Numerai, the crowd-sourced machine learning hedge fund / competition / crypto-currency company has shared its strategic plan and traction to date. There are delicious bits -- 30,000 data scientists have contributed predictions and including the value of the fund's native crypto-tokens, rewards to participants have been in the $USD millions. Predictions are pooled together using a staking tournament, where the data scientists express confidence in their algorithms by committing financial resources. A meta model aggregates and combines algorithms into a trading strategy implemented by the fund. The next step is to move away from human data scientists accessing the Numerai website to APIs that are accessed by Artificial Intelligences on demand. What does this mean? It means a black hole is developing in the capital markets, and is in the open for all to see. Numerai has the ambition to monopolize intelligence and capital, and then decentralize the monopoly. Will a global conglomerate that is committing $15 billion to building the world's most powerful AI be as altruistic?

ROBO ADVISOR: BlackRock All Chips on Digital Wealth

Are asset managers on the way to being technology companies? Financial Planning reports BlackRock is launching a dedicated Digital Wealth division, and Bloomberg reported it is looking to expand the technology portfolio to include risk assessment firm Capital Preferences. The asset manager previously purchased FutureAdvisor, invested in European robo Scalable Capital, funded iCapital Network, and delivers enterprise risk and portfolio management software Aladdin to investment managers. The firm is moving closer to becoming a technology enabler of its distributors -- broker/dealers, wealth managers, financial advisors -- which is a strategic play to be closer to the end customer and enable the selection of underlying investment products. Additionally, the firm has been building out its "quantamental" investment product, which combines big data and associated machine learning tools with fundamental security selection.

The first angle is the top-down industry view. There is no such thing anymore as "non-digital" wealth. All wealth management is technology powered, and some is powered by better and faster technology than others. Consider the Envestnet/Folio deal and the wealth tech powerhouse that created. Or the assets that Schwab and Vanguard have gathered under their branded umbrella. All wealth services, bar none, face greater automation, better consumer interfaces, and an increasing reliance on third party software. So in that sense, even though BlackRock had been fast in buying FutureAdvisor, it had not been fast in getting to market like Schwab and Vanguard. As other asset managers, like Fidelity, and traditional wealth managers, like BAML and UBS, offer their own roboadvice, the writing is on the wall. You either have the digital asset and are able to use it to compete for the distribution of future wealth, or your firm becomes a utility.

The second angle is around building out the full wealth tech platform. It is not enough to own a Millennial-focused roboadvisor (FutureAdvisor) or an enterprise-grade risk engine (Aladdin). The firm also needs to have trading, performance reporting, financial planning, client portal, automated billing, online account opening, and many other emerging features. BlackRock has been investing or purchasing some of these firms, but it is a long way to being Envestnet, or fostering the ecosystem of a Pershing or TD Ameritrade. So it makes sense to build a concerted effort around this if they believe in a tech-forward future. The third angle is that this is an overdue clarification of the digital strategy. Prior and through the FutureAdvisor acquisition, BlackRock had opened its doors to partners to support channels they were not ready to pursue. Their enterprise focus meant starting conversation wth $50B firms, not $50mm RIAs. But it's impossible to be open and closed at the same time -- meaning you either have an ecosystem of partners, or you focus on pushing proprietary solutions. This announcement shows their interest in leaning into owning the asset, and using tech as a growth vector.