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.