wealth 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)

DIGITAL WEALTH: Betterment gives in to its premium retail clients and drops its $100k minimum

Roboadvice – the automation of wealth management services – continues to put pricing and product pressure on the industry. Traditionally, financial advisors assess their fees as a percentage (1-2%) of the individual portfolio amounts they manage. Portfolio minimums have safeguarded the work expended by advisors in relation to the percentage fees earned. Roboadvisors like Betterment or Acorns feature lower barriers for customers as a result of their digitally native infrastructure, and thus low minimum balance requirements for a fixed set of portfolios - which require little human input. This not only enhanced B2C business for such Robos (i.e., individual investors opening accounts), but also B2B business (i.e., other financial firms using roboadvice powered platforms on behalf of clients). Betterment recently acknowledged dropping its $100k portfolio minimums for its 40bps premium service which gives retail clients the flexibility to customize their exposure in certain asset classes. We see this move in two ways, (1) to cater to the customers demanding greater flexibility, and (2) attracting and capturing customers from the ever-present competition, such as Acorns, Wealthfront, and Schwab.

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Source: Valuewalk (Wealth management), Betterment (For Advisors)

DIGITAL WEALTH: Schwab's $30 subscription, Abra and Bitwise on digital assets explain the future of wealth management

Roboadvice is close to our hearts as one of the first themes, but for digital lenders, to erode the walls around the most expensive parts of financial services. Between Mint.com in 2007 and our world in 2019 is an ocean of difference. We highlight three symptoms that show just how far we have come. First, Schwab announced a new pricing model for its digital wealth and financial planning offering. Core robo portfolios will remain free by earning interest on the cash allocation (listen up stablecoins!), while the human-augmented service will cost $30 per month with a $300 onboarding fee. While prior attempts at paying directly for planning services were attempted unsuccessfully by Learnvest, and Robinhood has a freemium model where a subscription fees earn you a margin account, Schwab is a way-bigger fish. 

We've pointed recently to the importance of understanding subscription as a shift from selling a manufactured product for a price (even if it is financed over time) to filling a consumer demand holistically. Subscriptions don't have lockups, can't take excess economic rents if your account grows from $100,000 to $500,000, and shift the business risk back to the business. They also squarely place Schwab among the likes of Apple, Google, Netflix, Microsoft, Salesforce and other *modern* consumer companies. Goodbye 1.5% on a minimum $1 million in assets for overpriced private equity and IPO access.

For now, $30 will only get you traditional money management. But if Bitwise and Abra get their way -- among dozens of other high quality companies -- investment infrastructure and associated choices will be changing entirely. Bitwise, a crypto-index fund with a passive approach, had authored a stellar document linked below describing the state of digital asset markets. In it, they show how to separate the 95% of noise in fake, manufactured crypto exchange volume created by bots to game rankings from the 10 real exchanges on which demonstrable human activity is taking place. We are building in the age of the Internet, and with that comes fake traffic, fake news, fake Twitter followers, and fake financial products. This document, and efforts by folks like Messari and DASA, is clearing the way for digital-native assets to actually work. None of this ecosystem, from investors to products to allocations to exchanges to crypto regulation, even existed in 2007.

So where is it going? One example is Abra, which has grown from a pure Bitcoin wallet to a provider of a synthetic asset allocation built using contracts-for-difference. While CFDs may not be accepted in all jurisdictions, don't look at manufacturing but at the customer. If a user can access stocks, bonds, real estate, private equity, gold, commodities, Bitcoin, tokens, banking accounts, loans and payments all from an app, that is the Holy Grail. And that is what the next 10 years is all about. The custodians and broker/dealers that have traditionally supported investment businesses, from Fidelity to Schwab, will move to integrate, own and support digital assets as well. And in that environment, solutions will not need derivatives to offer what is the most sensible package for the consumer. It will just be on your phone.

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Source: RIA Biz (Schwab), Yahoo Finance (Schwab), The Block (Abra), MessariDASABitWise 

BIG TECH: Apple's Credit Card, Google's Digital Gold, and IBM's Crypto Custody show the reckoning is here

After years of existential angst from finance executives about the big tech companies entering financial services, it is time to pay the piper. Excuses like regulatory cost and complexity, strategic disinterest, and complexity of products are incrementally falling away each and every day. Across every single vertical, something is nipping at the banker's ankles. The splashiest announcement came from Apple, which launched a credit card backed by Goldman Sachs (the storied mass retail financial firm!) and transacted over the MasterCard network. You can sign up for the card directly from your phone, which integrates it into Apple Wallet and Apple Pay, and provides a 2% cash back on all transactions made with ApplePay. There are no fees on the card other than an interest rate on credit.

For Apple, this financial product is one of a thousand features within their platform. It is no more or less important than music, video, news, email, or podcasts. The presence of credit makes customers more sticky within the ecosystem, offering 3% cash back on all Apple purchases. For Goldman, this is a leapfrog into the consumer market, riding a much better recognized and respected retail brand. Finance for the wealthy is just not cool anymore in the era of Bernie Sanders and Alexandria Ocasio-Cortez.

Meanwhile in India, Google and Facebook are battling with Paytm over payments. Facebook's rumored cryptocurrency will target sending remittance over WhatsApp. Google, on the other hand, is working on a service to add a savings account to money movement. This account will be backed by custodied gold, and may include expanded wealth management products -- from mutual funds to insurance -- in the future. None of this should be surprising, as Chinese tech companies have been providing mobile search bundled with online shopping, saving, investing and payments for the last five years. These Asian companies are moving into Europe and the US, sometimes by investing in neobanks or through acquisitions. Our American tech companies are moving into Asia.

Let's round out the whole thing with IBM, the OG of American tech companies. Several young firms like BitGo, Gemini, and Kingdom Trust have all built custody for crypto assets, including a notable recent announcement from Trustology about bringing custody to the iPhone. But IBM is now moving into the space, leveraging its expertise from working on enterprise blockchain projects via Hyperledger. What's important to understand is that financial products -- including their embedded capital, credit and investment risks -- are transforming from legal paper to software. And as that happens, it is technology companies that are best positioned to hold, analyze, report on, and safekeep our money. Among the incumbents, Goldman, JP Morgan, BBVA, Santander, DBS, BlackRock, Schwab, Fidelity, NASDAQ, ICE and several others get it. So many others think it is a false alarm. Which side are you on?

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Source: Apple Card (ForbesBBC), Coindesk (Trustology iPhoneIBM), Deal Street Asia (Google Gold)

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)

DIGITAL WEALTH: Schwab abandons desktop wealthtech as industry moves to open banking and investing platforms

We weren't planning to write about traditional wealthtech, but man, it's hard to pick your jaw up from the floor after reading this. Schwab Advisor Services, a $1 trillion assets under custody business, is selling its desktop portfolio management technology PortfolioCenter (which manages 2,300 advisory firms) to Envestnet for an "immaterial" price. The cost to Schwab of trying to pull those users into the cloud from desktop was higher than giving away the business, which generates about $10 million in revenue. Schwab retains its cloud version of the software, PortfolioConnect, as part of confusingly named AdvisorCenter. Reminder that one of the larger Envestnet shareholders is BlackRock, both a competitor to and manufacturer for Schwab's offering.

Fidelity paid up $250 million to buy eMoney, a cloud-based chassis for digital wealth management in 2015. The industry's conclusion was that custodians were going to be providers of technology in a freemium model, giving away tech and making money on capital. The independent wealthtech software houses (Orion, Black Diamond, ENV, AdvisorEngine, SigFig) could be in trouble. The Schwab sale of its client base given the cost of management legacy tech is enlightening. At the core, custodians are horizontal financial product platforms, enabling brands (e.g., RIAs, Cryptofunds) to deliver services to their customers. Sounds a lot like the other things happening in finance, which is open banking and data aggregation platforms building API-first layers. Can't be API-first with a desktop executable file!

So then what does a real platform look like in 2019? One take is something like Plaid, but we've discussed it before. Instead, take a look at Cambr. A joint venture between a community banking private equity firm (Stone Castle) and a core processing company (Q2), deposit products into tech apps are one integration away. Another version of a conceptually similar play is DiFi -- Digital Financial, previously Market76. Or, if we go one level down, every single bank participating in European open banking initiatives is becoming a financial product platform. See the awesome ranking Innopay has done of these below. And last, Apple itself. The hardware maker owns a massive attention and payments footprint, and is enabling none other than Goldman Sachs to launch a credit card. Apple is the platform, Goldman is the brand. We can see why Portfolio Center isn't super exciting. 

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Source: RIA Biz (Schwab sale), Schwab website, Fintech Platforms (CambrDiFi), WSJ (Apple & GS), Innopay

ROBO ADVISOR: Digital wealth re-fuels, as Acorns raises $105M from NBC Universal, Nutmeg $58M from Goldman.

Digital investment apps are the American poster-child for B2C financial technology. The vintage of the theme -- over a decade old -- has cooled some of the excitement about the transformational potential of mobile-first money management. Other products, like digital lending, payments, insurtech and challenger banks have grown on the venture radar. The reality, however, is that in each of these verticals, a brand champion has emerged after brutal competition to acquire customers. There is a best in class neobank, trading app, savings app, asset allocation app, etc. Sporting millions of users, these single product companies are fattening out into a multi-product relationship. And the roboadvisor attack into that space has just gotten stronger.

Nutmeg, the leading but modest roboadvisor in the United Kigdom, has just received nearly $60 million of fresh funding from Goldman Sachs. To earn the honor, the company manages about $1.5 billion (compare to Betterment's $15 billion-ish) and makes 50 bps in revenue. This isn't Goldman's first rodeo either, with prior acquisitions of Honest Dollar and Clarity Money -- neither of which were cheap. Even more relevant is the entry by the company into the UK with Marcus, it's Lending Club clone for personal loans. Unlike Lending Club (or Funding Circle), Marcus is attached to a bank that can provide interest to customers, and therefore natural funding for loans through deposits. That can't feel good to Monzo, Revolut and other neobank friends. We expect Nutmeg to join this lightly integrated family of broad financial products pushed by the investment banking behemoth to retail customers.

The other piece of news is arguably even more sensational. Acorns, serving 4.5 million customers (compare to Robinhood's 4 million, or Coinbase's 15 million), of which nearly 400k have IRA accounts, has raised $105 million from a conglomerate of media companies like NBC Universal and Comcast Ventures. Acorns manages $1.2 billion in assets (compare to $1.5 billion at N26) and now has a $860 million valuation. How does this story make sense? Media and finance are inextricably linked, and in the American case the glue can be financial literacy. CNBC content in the app will drive engagement, the media marketing funnel will create engagement, PayPal provides the payments and bank rails, and the bet is customer stickiness and margin expansion over time. It's starting to feel a bit like Alibaba in there!

So where are the parts of digital financial advice that are still early and not winner-take-all venture bonfires? Most digital-first financial services were built by Millennials for Millennials, and therefore have a blind spot for older generations. Companies that use modern tech for the issues facing Boomers aren't getting picked up in Techcrunch, but have a similarly large opportunity. Examples include Vestwell (B2B robo for retirement), RightCapital (financial planning with focus on tax optimization and pensions), Whealthcare (financial caretaking as clients are no longer medically fit to make decisions), and Mike Cagney's Figure (home equity digital lending). Do good and do well. 

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Source: Companies House (Nutmeg), Mobile Payments Today (Acorns), Company Websites (RightCapitalWhealthcareVestwell)

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: Titan startup mimics hedge fund trades, repeats mistakes of the past

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It's 2018 and startups like Titan are still launching B2C roboadvisors claiming to invent the "modern, mobile version of BlackRock". Did we forget that FutureAdvisor, a modern, mobile version of a money manager, was bought by BlackRock in 2015 for $150 million, and is now being deployed both B2C and across financial institutions? Or that SigFig (previously WikiInvest) has gone through the same pivot, and is now powering financial advisor platform CoPilot for Citizens Bank, backed by UBS. Or that HSBC just signed Marstone as its provider of similar software? Or that WisdomTree did the same with AdvisorEngine, or Invesco with Jemstep?

Titan scrapes hedge fund filings data in order to mirror their purchases into a basket of 20 stocks for the price of 100 bps per year, which is 2-4x more expensive than most roboadvisors. This was also done before. Remember AlphaClone, or Covestor (sold to Interactive Brokers), or Motif (now sells IPOs), or Kaching (now Wealthfront)? The idea that there is a "pro-sumer" audience that wants to delegate investing a little bit, but still retain control to pick directional themes, has been repeatedly proven wrong. Having raised $2.5 million and grown assets under management to $20 million does not change the underlying issue -- the market does not exist at scale.

If you think we're being too critical, here's what appealed to token Millennial Matt Low from our team: "We are all human and succumb to peculiar logical blindness when the words “hedge fund”, “algorithmic trading” and “Mobile BlackRock” are placed together in the same article. This was particularly the case when reading up on Titan, which appeals to my mindset of supporting anything but the glass tower financial monoliths of Wall street and Canary Wharf". Fair point, Matt. But there's only so many of you to go around. To make Titan actually work, you'd need to funnel in $100 million of growth capital to acquire customers, cross-market banking, payments and insurance products, and then sell the whole mess to BlackRock.

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Source: TechCrunch (Titan), Wealth Management (SigFig), Company Websites

WEALTH MANAGEMENT: Fidelity launches Crypto custody, has won this game before

Everyone knows: Fidelity has made its move into crypto custody. The firm has been toying with an offering into the space since starting to mine Bitcoin since 2015. The product itself is exactly what institutional investors, i.e., fund manufacturers, have been complaining about over the last year: (1) a custody platform, akin to Coinbase / Xapo / Bitgo / Kingdom Trust, and (2) an order routing system that creates best execution across exchanges, independent versions of which also exist (e.g., XTRD). But to package it and make it accessible for the traditional financial services industry is a massive leap for the asset class.

Here's what many people don't know. Fidelity is one of the top 4 investment advisor custodians in the United States -- including BNY Mellon Pershing, Schwab, and TD Ameritrade. Together, these firms control about $2 trillion in advisor assets, with another $1 trillion in independent RIA assets sitting on smaller players or self-clearing firms like LPL. These custodians know (1) how to service a long tail of small independent money managers, (2) throw annual conferences attended by thousands of people to look at investment products, (3) enable hundreds of wealth tech companies to sit on top of their core services, and (4) deliver performance reporting and other tools helping regular people access their assets. That is not something any of the crypto players come close to doing or understanding.

To moderate our excitement, we highlight that serving a manufacturer (i.e, a crypto fund) is not the same as serving a distributor (i.e., a financial advisor). Still, we believe the software is transferable to some extent, and the entire world of digital wealth management awaits open APIs here. Second, we think best execution will be a real boon to the space, unbundling what an exchange should do from what a broker should do. If regulators like the NY Attorney General continue to find bundling and conflicts of interest offensive, some US firms will have to be broken up into component parts and spun off. Not Fidelity -- which will benefit from being impartial. And further, with enough volume and a good routing system, perhaps arbitrage bots and crypto market manipulation may start to fade out of the ecosystem. Fidelity's entry -- though long time in the making -- is a clear win for crypto.

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Source: BloombergCNBC, Fidelity (RIAsCrypto)

CRYPTO: Surprises from the Dallas Digital Assets Strategies Conference

We chaired a unique event in Dallas this week, and a few key takeaways are worth mentioning. First, something that really stuck out was the audience itself. We informally surveyed about 150 attendees, of whom 50% were financial advisors allocating assets for retail and HNW investors. Further, 70% of the audience owned Bitcoin, 50% owned ETH, and about 15% participated in an ICO directly. Two people, not including Lex, had the unfortunate pleasure of buying Crypto Kitties. The largest financial advisor in the United States, Ric Edelman, who runs $200 billion across 85,000 clients, stayed with us for the full agenda. Just a year ago, the overlap between the wealth management and crypto communities would be a null set. 

On the fund manager side, we had Tuur Demeester from Adamant, Sean Keegan of Digital Asset Strategies, Kyle Samani of Multicoin, Mat Hougan of Bitwise, and Bart Stephens of Blockchain Capital. We were impressed by the very variety of investment strategies on display. For example, Tuur primarily runs a Bitcoin investment strategy, using leverage on/off BTC to amplify alpha.  Similarly, the custodian Xapo only custodies BTC, backed by a reserve of coins -- $10 million worth bought in 2014. Others run index funds -- with Bitwise creating passive indexes and Digital Asset Strategies trying to deliver smart beta on the same baskets. And of course, Multicoin and Blockchain Capital both take fundamental venture-style bets on direct projects. We were reminded again of the BCAP token offering, a security token that Blockchain Capital launched as a unit in its fund. 

We can't do justice to all the conversations (i.e., custody, regulation, markets), but another one that stuck out for us was an asset allocator panel. Paul Pagnato of PagnatoKarp, a wealth advisor to large family offices, sees crypto living inside the venture capital allocation slice. James McDonald of Vishnu Wealth Management talked about building a 10-15 coin basket with the largest liquidity, while protecting for downside exposure. And we'll end on the perspective of Tyrone Ross Jr., who never wanted to put his clients into crypto assets. Instead, his clients just started disclosing to him their over-exposure to digital holdings -- so he had to design hedges and diversification strategies that would balance out the idiosyncratic risk. He also had to start reading white papers and websites to figure out what his clients were talking about. Advisors with such an appetite will retain their clients relationships, while those like Noriel Roubini will be drowned out by the winds of time.

Source: Tyrone's     Video    , DASS     Twitter    , Lou Kerner on     Nouriel Roubini    .

Source: Tyrone's Video, DASS Twitter, Lou Kerner on Nouriel Roubini.

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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FINTECH: If Amazon Did It -- Entry into Mortgage Finance and Wealth Management

Ah, the constant specter of BigTech gobbling up finance. In this installment, rumors are circulating that Amazon may be interested in acquiring LoanDepot, a non-bank lender founded in 2010 with over 6,000 employees and 180 locations in the United States. The asset in this case is geographic reach, loan underwriting software, and the human presence that is still necessary to deliver financial products to the long tail of the American population. But such rumors are most likely false, especially since the CEO of LoanDepot sarcastically shot them down. Also, imagining such an acquisition betrays a lack of understanding of Amazon's platform strategy, which optimizes around users within the Amazon ecosystem, and not sales of financial product. 

So we want to point you to two resources to help anchor that platform strategy. The first is a comprehensive analysis by CB Insights on the financial services moves that Amazon has made to date. Highlighted below are a few of the key graphics. Amazon's product strategy has been around growing payments and lending -- in order to facilitate commerce in their core offering. Meaning, if underbanked customers can use Amazon's cash products or consumer credit to purchase goods, that's great! If merchants can get an SME loan via Amazon that helps them offer more products on Amazon's platform, that's great! If purchased products are insured via Amazon's partners, that's great! You can see why re-financing a mortgage doesn't quite make sense in this context, until Amazon sells residential real estate that is.

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And second, we spent some time with the 2018 World Wealth Report from Capgemini. It surveys the growth in global HNW investors, their preferences and asset allocations. And this year, they also asked whether investors would hire a BigTech firm as a wealth manager. About 40% of the respondents said they would give such a firm 10-50% of their share of wallet, with Asian and Latin American millionaires showing the highest appetite. Further, the report suggests that most likely outcomes for BigTech entry into finance are: (1) partnering with manufacturers of asset management product, (2) unbundling the financial services industry through competitive payments and banking products that are priced below industry levels, (3) providing services and software into incumbents, and (4) partnerships via messaging platforms. Least likely outcomes are (a) no market entry at all, and (b) acquiring a wealth management firm. Google, Apple, Amazon, Alibaba and Tencent are all desired entrants into the wealth space. So if you're a financial incumbent, time to accept your fate and get into a pole position for partnership.

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Source: CBInsights (Amazon summary), Inside Mortgage Finance (Loan Depot), Capgemini (World Wealth Report

REGULATION: Crypto Funds, RIAs, Regulations in a Box

The cost of launching a startup has fallen from a few million to a few thousand dollars. Why? Amazon and its cloud have collapsed the needed IT infrastructure to a cheap off-the-shelf subscription. Stripe Atlas has made corporate and payments gateway setup a breeze. But what if you're starting a financial entity, and not a software company? What if you're starting a Registered Investment Advisor, and not a wealth tech platform, or if you're starting a hedge fund offering a crypto index, and not a blockchain of blockchains? For that, let's take a look at compliance in a box. 

One of our favorite companies in the independent wealth management space is RIA in a Box. It does what it sounds like -- it sets up a Registered Investment Advisor entity, registers it with the SEC and the appropriate States, and manages ongoing compliance requirements as an affordable service. So if your advisory practice manages $5 million or $500 million, this solution can get you started. In fact, out of 12,000 RIA firms in the US, RIA in a Box has 3,000 as clients. Not surprisingly, Aqualine Capital Partners just acquired the firm through an LBO at an undisclosed price, which tells us that the firm is a cash cow -- an LBO requires a slug of debt that can be serviced by reliable, steady cashflow. And if you control the compliance reporting aspect of a financial entity, it's a very short reach to start selling regulatory, administrative and value-add software.

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Now think about crypto funds. It's the same problem -- nobody has any idea how to structure them, which regulatory jurisdiction to pick, what bank to use, or how crypto assets are treated. Traditional counsel could easily cost over $100,000 to go through the motions. Enter the Crypto Fund-in-a-box companies! Take Vauban, which provides an interface to select a type of investment fund, its jurisdiction, target size at launch, while a real-time entity structure is built on screen indicating the cost of setup. Other similar plays include Fundplatform, Otonomous, and Bluemeg (note: we don't know or endorse any of these). Could the ease of solving this international puzzle lead to a similar growth outcome for crypto fund entities? Looking at the data, the first 5 months of 2017 saw 40 new crypto funds; there were 45 new entrants over the same period in 2018. Market volatility has not deterred fund formation. That doesn't mean funds won't fail (e.g., Apex Token Fund shutting down after failing to raise $25mm), but it does mean more will keep trying if it's as easy as clicking a button.

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Source: RIABiz (RIA in a box), Crypto Fund in a Box (VaubanFundplatformOtonomousBlueMeg), Financial Planning (RIA totals), Autonomous NEXT (Crypto Fund totals), Stripe Atlas

REGULATION: Hypocrisy on Fiduciary Rule in Bitcoin Age

Source: Federal Bar Association - Fifth Circuit

Source: Federal Bar Association - Fifth Circuit

The financial services industry seems lost without a moral compass, like a tin man searching for his heart. On the one hand, take the role of financial advisors. During the Obama administration, the Department of Justice put forward a "fiduciary rule" that implicated financial professionals selling investment product to behave as a fiduciary on their clients behalf, if that investment product somehow reached into retirement assets. Of course, most investment product does reach into retirement assets, and by association extends to brokerage assets. Acting as a fiduciary generally means charging the lowest-market fee reasonable for funds, not getting paid additional kickbacks, not promoting proprietary products, and planning for the client's future. A federal appeals court (Fifth Circuit) just overturned this attempt to legislate the standards in the industry, but the rule was out of favor anyway as Trump's officials in the DOJ kept postponing enforcement.

Why do we need something like the fiduciary rule? The answer is that financial professionals selling investment product are kind of like doctors in a lab coat. Their self-branding creates the impression of professionalism and knowledge, which in turn persuades retail investors to purchase investments. Abusing that power by delivering inconsistent or biased advice (i.e., clients with similar needs getting different prices and products) is a social negative, which is why the SEC is now looking into creating some alternative to the DOJ fiduciary rule. And the SEC regulates investment advisors, making it more likely that they have jurisdiction over the standards. It is generally believed that such a rule helps roboadvisors and augmented financial advisors, because technology can record the standard to which advice is given, and all the legal documents and financial recommendations are tracked and can be compared to client circumstances. Not having the rule excuses choppy behavior and implementations and the inconsistent behaviors of brokers. Deregulation lowers the need for technology to keep us honest.

And yet, look at the inanity of the congressional hearings on crypto currency. Senators unfamiliar with the underlying software or the drivers of innovation in digital assets are spouting judgments about what investors should and should not be able to purchase. Representatives are claiming that they will not sit idly and "fail to protect investors". While it is certainly true that investor protections, and especially clear and transparent information should exist, there is a deep hypocrisy here. Deregulating the sale of traditional financial asset such that the sales processes can be biased is fine, while allowing for a self-funded global ecosystem of digital assets that is literally building its own capital markets is dangerous.

A consistent policy for Fintech would favor the efficiency of financial technology over the human status quo, which would mean distribution through software platforms of modern packages of a variety of investment vehicles. Financial professionals (and their software extensions) should be selling reality to their clients. But if individuals want to shoot for the moon based on personal decision making, the best we can do is global financial literacy and transparent data. Instead, we have a circus.

ROBO ADVISOR: Tigercub Roaring

Source: Google Trends

Source: Google Trends

Hmm. So one of the most cut throat hedge funds, Tiger Global Management, just led a $75 million round in #2 American roboadvisor Wealthfront. There is some irony about an alpha-chasing investment product manufacturer putting in a growth stage check into a passive-ETF asset allocator that targets techy Millennials. Is Wealthfront the ultimate tiger cub? Is this the death knell of equity alpha? Or maybe just another example of an asset manager investing in a distribution play to the consumer, like BlackRock and FutureAdvisorWisdom Tree and AdvisorEngine, or Jemstep and Invesco? Regardless, we wanted to kick the tires around what this $75 million check could mean to the $9 billion RIA. 

Raising money signals multiple things. First, it signals the need to raise capital. This can be driven either by a large cash burn, or the desire to scale quickly to take over a market, or both. In the case of B2C digital wealth, we know that there are no winner take all dynamics for the first wave of roboadvisors by watching the AUM trajectories of the companies in the space. For asset allocators, AUM growth is linear, not exponential. Acorns, Stash, Robinhood, Coinbase are different. Perhaps Wealthfront can tap into their customer acquisition dynamics and product set to open new options (i.e., add crypto like Revolut and some money movement AI). Or perhaps $25 billion in assets is breakeven, and the venture play is for a much longer time horizon, like 10 years from today.
 
Second, raising money signals the company’s skills at raising money. This can be dependent on product traction, the impression of equity scarcity, and personal networks. In this regard, we do think that Wealthfront has a powerful hand. Living at the heart of the Valley and being run by a well respected venture capitalist implies continued access to capital given sufficient company progress. But, in the global landscape, capital is cheap. If Softbank can write $100 billion of venture checks into American fintech, capital access can't be the determining long-term winning factor. So how is Wealthfront going to do against Betterment? Check out the customer demand below and let us know what you think!

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ROBO ADVISOR: Schwab Digital Wealth Takeaways

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We spent two days this week presenting at Schwab IMPACT, one of the biggest financial advisor conferences on the planet with 4,000 attendees in the ecosystem of a multi-trillion dollar asset manager. One presentation was on the effect Fintech was having broadly across wealth management, featuring slides with Neuromancer, Terminator and BladeRunner art, and concluding that AI will build the "first draft" of all work, and humans will finish it for human consumption.

The second presentation was on how advisors should leverage technology to drive efficiency and scale. We now know that roboadvice is not about customer acquisition, but about customer processing. This means robos are very good at creating operational efficiency, automating allocations, opening accounts, but terrible at attracting new customers. This is the learning from most of the private-labeled digital wealth platforms to the RIA segment. So in order to use roboadvice efficiently, advisors need to understand how to use social selling and online marketing to attract customers.

This is different from being a local expert in a town -- a strategy that supports 10,000 different small and mid-size firms today. Instead, it means competing in the attention economy against everything that distracts us, in world where people have only 5 financial apps on their phone. One of those apps may be the new Standard Chartered AI chatbot. We have also talked before about how people consume 11 hours of media in 9 hours of consumption by multi-tasking across several screens, The competition to financial services is not just other financial services, but Kanye West, Grumpy Cat and Snapchat. So financial professionals must develop a powerful voice and story that focuses on the things their clients want. After the session was over, one skeptic stopped by and said --  "But many people here have nothing to say that is differentiated". Indeed.

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.