Rapid changes are occurring in the wealth management space and the level of disruption in how advice and capital are managed is only beginning. Wealth management is a monumental industry. The players in the space run the gamut from gigantic hedge funds to individuals who manage their own investments. This changing wealth management landscape is driving a significant uptick in transactions. Power Financial Corporation strengthened a partnership with Wealthsimple via a strategic investment of $37 million for its Series B, which will allow for expansion of Wealthsimple across Canada and the U.S. and also spur growth of Wealthsimple’s B2B platform for wealth managers. TIAA acquired MyVest, a cloud-based platform for wealth managers. BlackRock is wading into the sector with a recent investment in Scalable Capital. Traditionally, wealth managers have operated with a relatively low-tech Infrastructure, but new-age customer needs, e.g. automated rebalancing, portfolio construction and tech-enabled communication solutions, are driving the technology revolution at large banks and small advisory firms. Intensifying market competition and more stringent reporting requirements now require wealth managers to technologically reinvent themselves. The advent of robo advisors and other online disruptors who democratize wealth management is also pushing the need for technological reinvention. These digital players are actively competing with traditional wealth managers on pricing and level of market penetration.
A Market Poised for Extended Growth
The period from 2006 to 2061 is expected to see a total of $59 trillion shifted from the baby boomers to the millennials, charities and the federal tax system. Millennial clients want greater transparency, more control over their investments, digital access, and customized service—a significant shift in the client profile for wealth managers today. With such a large amount of wealth being created and transferred, the wealth management industry is set for an extended period of growth and needs technology to stay relevant. As a result, firms in the wealth management space are aggressively on the lookout to acquire technological capabilities through acquisitions, technological collaborations, and corporate venture investments. Both M&A and investment transactions are occurring more frequently. Several of the high-impact transactions include:
- JPMorgan invested into InvestCloud and also created a joint partnership in September 2016 to help the firm interact more efficiently with its wealth managers.
- Goldman Sachs acquired Honest Dollar for an undisclosed amount in March 2016 to penetrate the small business market that’s seeking to setup employee retirement programs.
- BlackRock bought FutureAdvisor for $152 million, according to Pitchbook (with an earn out on top of that according to industry participants), despite the target generating only $3 million of sales at the time of acquisition. FutureAdvisor was acquired in September 2015 as a solution geared to wealth managers but as one also able to serve banks, broker-dealers and other financial service companies. Since 2013, BlackRock has acquired or invested in several additional digital account management firms, including Personal Capital, iCapital Network, and Scalable Capital.
- Advent Software was acquired by SS&C Technologies in July 2015 for $2.7 billion, which was an aggressive purchase price multiple of 19.4 times forward estimated EBITDA. Acquisition comparables in this space generally range from 7-to-15 times enterprise value to EBITDA. The transaction continues the trend of financial companies outsourcing systems and Advent Software will obtain deeper access to software systems used by over 4,000 investment managers.
Incumbents Are Taking Notice
Incumbents (banks, broker/dealers, RIAs, insurance companies) are faced with acquiring fintech companies or developing these capabilities themselves. They are uncertain about how to go about developing new technologies and are unwilling to support the high investment cost to do it in-house, which is often up to $50 million.
Early movers in the wealth tech and robo advisor space, such as Acorns and Betterment, operate a direct-to-consumer model with a set of predefined funds investors can select (although in September 2015, Betterment entered the small business market to offer 401(K) accounts). The incumbents are sensitive to this disruption and have started to partner with other movers who have more of an enterprise approach and desire to drive down fees. As the market starts to become more saturated, players such as Trizic and Hedgeable are focusing on selling at the enterprise level in order to quickly reach a larger market.
Established financial institutions, such as Goldman Sachs, JPMorgan and UBS are acquiring wealth tech and fintech companies across the spectrum. Companies in digitization, software applications, and online trading have garnered high interest from financial institutions in recent years.
Below is a select set of partnerships between larger and smaller firms in the space.
The partnership between WisdomTree and AdvisorEngine was inked in November 2016. WisdomTree will introduce AdvisorEngine’s platform across its distribution network where their asset allocation model will be available. In April 2017, WisdomTree invested $5 million into AdvisorEngine.
In August 2017, Advicent, a SaaS provider to the financial services sectors announced an integration with Envestnet, a solutions provider that reaches 65,000 wealth managers. This is a great example of how “integrated data and technology can turbo charge advisor productivity…” according to Lincoln Ross, EVP, head of product strategy and marketing at Envestnet.
General Wealth Tech Transaction Trends
Investments in wealth tech have been in a general upward trend over the last five quarters. In June 2016, TIAA acquired MyVest, which provides a cloud-based platform for wealth managers that will accelerate TIAA’s services offering. BlackRock further stepped into the sector in June 2017 by investing $34 million in Scalable Capital in an effort to improve their distribution model. Through July 2017, over 40 deals worth approximately $315 million have closed, with 65% of these being early stage (i.e. seed and Series A transactions). Financing activity is projected to intensify this year, with both transaction volumes and values surpassing 2016’s record of $796 million, according to Pitchbook. The growing demand for data analytics, portfolio rebalancing solutions and machine learning capabilities have both wealth managers and tech companies lining up to acquire early-stage wealth tech companies. VC and PE funds see the opportunity for highly profitable exits in the future for today’s investments. This high interest has resulted in strong valuations of select wealth management tech companies.
Valuation Considerations and Predictions
Due to the early stage of the industry, the valuations of companies in the sector vary widely and proper classification of companies are still developing. Broadly speaking, in the emerging wealth tech space you have software platforms (e.g. Addepar), robo advisors (e.g. FutureAdvisor or SigFig) and the more established asset managers (e.g. WisdomTree and Vanguard) at the mature end of the market. These established players are often valued on their book of business as a percent of assets under management (AUM) or assets under advisement (AUA). The emerging robo advisor players, which help drive assets under management, have seen valuations as high as 64% of AUM in the case of Acorns, and 143% of AUM for SigFig. These high valuations are due to the lower starting points of their asset base. BlackRock’s high acquisition cost for FutureAdvisor can be attributed to their large ETF offerings and distribution network, which can benefit greatly from FutureAdvisor’s growing client base. Based on Evolve Capital Partner’s internal analyses, we see most wealth tech robo advisor platforms garnering a valuation between 10-25% of AUM across financings and M&A transactions.
Wealth Tech Market Trends
According to a poll by Vestmark, 70 percent of wealth management firms are embracing robo technology to complement their existing service. However, running business-to-consumer platforms involves significant challenges including high customer acquisition costs and regulatory hurdles. “The biggest challenge facing B2C robo advisors is the astronomical cost to acquire a customer,” noted Drew Sievers, CEO of Trizic. “Existing wealth management firms as well as banks and credit unions, already have millions of accounts that can benefit from the operational alpha created by digital wealth management and workflow solutions.” Services such as CRM and customer experience maximization are in demand. Partnerships are key because of the long sales cycle of trying to sell directly to enterprises and high direct-to-consumer customer acquisition costs. There has been a slew of partnerships in the space to help accelerate adoption of a company’s platform. Select partnerships and/or investments
- In June 2017, Trizic, a leader in enterprise class digital advice and workflow technology, announced a $2.5 million investment led by PEAK6 Investments, L.P.
- PEAK6 is the owner of Apex Clearing, a leading provider of digital wealth solutions that enable fintechs and Fortune 500 enterprise advisors to succeed in the digital age.
Apex Clearing’s CEO William Capuzzi shared the company’s focus, “Our clients have consumers looking for a better, faster and more personal way of investing. Our job is to recognize the unique needs of this digital generation and provide them with solutions that simplify and speed up the account opening and funding process.”
- In June 2017, Trizic announced a strategic partnership with FIS. Leveraging Trizic’s digital account management and automation technology, FIS can offer enhanced financial planning and advice services to more effectively manage mass affluent clients and attract tech-savvy millennials
- Prumentum Group is looking to combine the technology of a robo advisor with the human touch of a wealth manager. In May 2017, Prumentum raised $25 million in a Series A round and acquired a minority stake in Plancorp, a registered investment advisory firm with $3.6 billion in AUM. Through its tech platform, BrightPlan, and human wealth managers from Plancorp, a hybrid-robo solution is created to provide services to consumers at scale.
- In February 2017, Marstone, which provides account aggregation, digital financial planning tools, portfolios and an interactive questionnaire process that can be tailored to firms’ existing workflows, partnered with Fiserv’s Unified Wealth Platform so wealth managers, broker/dealers, banks and credit unions can implement a digital advice strategy, whether it be a self-service “robo advisor” or a hybrid model.
- Fiserv was watching the robo advisor market over the past year in an effort to find a product that would work for its large client network of diverse business styles, sizes and custodian affiliations. Fiserv wanted something it could incorporate across all of its platforms, so wealth managers didn’t have to jump around to find client data.
- Fiserv is an extremely reputable group and has very stringent criteria for onboarding companies. This is a huge win for Marstone.
- InvestCloud announced a partnership which dovetailed with an investment by JPMorgan’s digital wealth management group for an undisclosed amount in September 2016. JPMorgan can now compete more aggressively with competitors who have taken major steps towards digitalization across their retail and investment banking operations in recent years.
Select emerging players such as Scalable Capital, WealthSimple, InvestCloud, and AdvisorEngine have paired up with larger institutions to help drive volume and adoptions across large groups of wealth managers. The strong partnerships and strategic investments will continue as we are only scratching the surface of change in the wealth management industry.