*View of Queensboro Bridge from Cornell Tech
Ben Alden, Cornell ’06, crossed the East River to take more than four hours out of his hectic day to come speak to our FinTech cohort. As General Counsel of Betterment, one of FinTech's most promising startups, Ben could have been working with regulators to shape industry governing policies or creating structure within a rapidly expanding startup, but instead he was on Roosevelt Island having lunch and speaking with students eager to learn about WealthTech. Sitting with him at lunch, I realized that my MBA had come full circle.
*Ben speaking to the FinTech Cohort
Industry Shift
It has been a little over two years years since I informed my boss that I would be leaving Bank of America U.S. Trust to pursue my MBA. I had worked for U.S. Trust for over four years, and having joined directly from The College of New Jersey, it was the only corporate environment I really knew. At UST I supported two Senior Portfolio Managers and my own book of business, which totaled $1.5 billion in assets under management (AUM). As investment professionals in the wealth management space, we invested this capital across all asset classes, from equity to fixed income, private equity to real estate.
A key reason I decided to pursue my MBA was to deepen my knowledge around the many nascent FinTech industries. In retirement investing, aka wealth management, budding robo-advisers offered portfolio construction for a fraction of the cost. Across the industry there was noticeable fee compression. Many wealth managers chalked this trend up to the underperformance of active managers and believed that this trend would reverse once volatility returned to the capital markets. The belief was that active managers would outperform when volatility returned (justifying their higher fees by generating alpha) and clients would abandon robo-advisors in a down market. Conversations within the industry always sounded as follows:
“Robo-advisors are not to be trusted, they have no track record and won’t survive long enough to build one.”
“That’s cute, but would you really trust your money to computers?”
“It’s that cheap to setup? Well you probably get what you pay for…”
Fast forward and volatility returned in a big way in 2018. This is evident as the CBOE Volatility Index (VIX) has hovered closer to 20 since 2018, compared to being anchored around low to mid-teens from 2012-2017. Despite this, Betterment is rapidly approaching $20 billion in AUM and Wealthfront is over $10 billion in AUM.
All that being said, it is estimated that the High Net Worth Individual market has net investable assets over $26 trillion in the US alone, for 2019. These new WealthTech firms do not even show up on the radar for market share, and larger incumbent wealth mangers have rolled out their own automated investing tools to compete. Schwab’s Intelligent Portfolios (their robo-advisor) already has more AUM than Betterment and Wealthfront combined, and it is aggressively priced at a 0% management fee. Traditional wealth managers also add value through additional services like lending (mortgages/lines of credit), banking (checking/savings), and financial planning (complicated trusts and wills). Larger clients with more than three million dollars of investable capital typically have more complicated financial needs, so wealth management firms logically will continue to exist. They will serve this more profitable customer segment, but what about the underserved segment that has less than $3 million in investable capital?
It is clear that competition and innovation has created additional value, which has accrued to consumers in the form of lower fees and more transparency across the investment industry. On the trading front, Robinhood is winning individual trading accounts by offering $0 commissions to execute client’s trades, and traditional online brokers have been forced to reduce their commissions. Most importantly, there is additional transparency in the wealth management industry, due to these neo-FinTechs. They have brought additional attention to the all in cost of investing, and clients are going back to their advisors looking to better understand the cost of owning their mutual funds and ETFs. They are asking about all the fees and costs to trade with their online brokers. Consumers are educating themselves on both the explicit AND implicit costs of working with their advisors.
*Studying is easier with beautiful views
Never too Late, Until it is…
The broader question for both online brokers and wealth managers is are their business models setup to handle this drastic reduction in revenues? These incumbents have bloated cost structures that may not be able to compete against the leaner, technology focused FinTechs. Another clear distinction lies in the demographic of their target customers. FinTechs like Betterment and Robinhood focus on younger Millennials and Gen Z, while legacy institutions target the more profitable Baby Boomer and Gen X. What happens when generational wealth is transferred to Millennials and Gen Z? Do legacy wealth managers have enough brand equity or family loyalty to keep these assets under management or will robo-advisors accumulate market share as these financial assets are passed on? Now that the younger generation is bought in, is success inevitable? One thing is certain, my conversations around robo-advisors no longer contain adjectives like strange, unsafe, and silly, instead I am hearing cost efficient, transparent, effective, and easy to understand…
A special thanks to Ben Alden for leading such a captivating discussion and for taking so much time out his day! I can’t imagine a better way of learning than from a thought leader and expert who is helping to shape the financial services industry