Paint By Numbers: RoboAdvisors

From I ❤ Wall Street:

They say art is in the eye of the beholder so I want to get your take on something I painted in my studio today. I think it’s pretty good, way better than the macaroni art I made last week.

The subjects of this picture are three firms using algorithms to manage your portfolio auto-magically, also generally known as RoboAdvisors: Betterment, Wealthfront, and FutureAdvisor.

I’ve got a working title…”The Robots Are Coming To Eat Your Face Off, And Kill You, Or Maybe Probably Not.” This is my second series about RoboAdvisors. Series one was here, in case you missed it. So, let your eyes behold…

(click to embiggen, as Will Shakespeare would say)

Now, to be a masterpiece of a growth business you need some of the following elements in your body of work: a hyper-growth opportunity in a market that adopts your product readily and pretty quickly (big numbers), with great margins, and a unique moat.

Big Numbers?

To give you an idea of what kind of big numbers I’m talking about, in 2003, after their first year in business, LinkedIn had 500k users and they raised $4.7 million in venture capital. 2004, 1.4 million users, raising another $10 million. 2005, 4 million users. By the end of 2007 they’d reached 9 million users, going back to the till for another $12.8 million. So, nine million users in five years, raising $27.5 million in ventured capital.

HTIC recently interviewed Bo Lu, CEO of FutureAdvisor, on the heels of their latest $15 million infusion of venture capital ($20.5 million total). And, Bo knows big numbers:

There are 32 million mass-affluent Americans-with assets between $100,000 and $1 million-and only 20 percent have an advisor. Sixty percent of families with more than $1 million in investable assets already work with a financial advisor. Eighty percent of our clients never have had an advisor. No ecosystem has ever served these people. That’s a big gap that’s artificial and made by economics. We want to bring the penetration up to where it is for affluent, and that is a 14-million-household opportunity.

So, this is big! Let’s celebrate…

I want to celebrate that 14 million household optimism, I really do. But, as an artist, I’m dark and tortured, so I can’t. When I see that after six years in some cases (Wealthfront and Betterment), the average account size between them is still about $47,000, and they now have almost 44,000 clients collectively I just cringe to think maybe we’re seeing another Adam Sandler film in the making. By the way, FutureAdvisor was founded in 2010, and currently has 800 clients.

So, margins then…

These RoboAdvisors want to “disrupt” whatever idea they have about the status quo, and they’re collectively generating about $3.8 million in fees annually as such. But it’s all software, so it must be hugely profitable, right?

The real liability in this equation is simply reality; the robots need humans. Today, there are roughly 100 people running the robots. So, if these employees are making only an average of $140k a year (my rough estimate using Wealthfront’s own compensation tool), including the executive suites, and “world-class” engineers and programmers, and all the people who still need to answer the phones and emails, then they are burning through roughly $14 million a year. Any guesses on what that number really is?

That number doesn’t including buildings or any travel, because this is the future — where everything is Skype, holograms, and email. It doesn’t include the globs of green being splashed around the web with marketing campaigns & promoted social media streams (’cause this is gonna be super viral with huge networking effects). Nope. This $14 million a year is just for the people. To generate $3.8 million in fees.

It’s the spreadsheet version of Matisse’s Blue Nude II, right in front of you. Just a hint of movement within the rough lines of an outlined shape of a timeless form.

Wealthfront, the biggest among the three firms I’ve highlighted, said last year they would need to manage $40 billion to be suitable for their investors. Now, I’m not sure what “suitable for their investors” means, but they’re 2% of the way there. Of course, that’s not including the dilution those investors just realized after the company raised another $35 million in venture capital this year. Now to be fair, I’ve chatted with Wealthfront’s CEO, Adam Nash, and I really like him, but as a movement for all of these firms I wonder…

Moar Moat?

In the business world moats are good. They keep competitors away, either by making things too expensive to emulate, too big, or too hard. Right now in the financial world there are at least 10 different companies I can name without even lifting a brush: Learnvest, SigFig, Next Capital, Personal Capital, Betterment, Wealthfront, Jemstep, MarketRiders, FutureAdvisor, and Covestor. All of them are basically proposing the same thing for the same audience: we help manage money and/or help plan for less, we’re smarter, and we make the user experience super duper cool & easy. For the end-user, though, me thinks we’re talking about the difference between sky blue and azure. Don’t ask me, I don’t know…

But, at what point do we see a big bank or brokerage firm (where TRILLIONS of dollars and MILLIONS of accounts are NOW) decide, “Hey, maybe we should offer a robo-advising service too?” Within a year or two using some simple reverse engineering, hugely profitable balance sheets, massive infrastructure, and tons of people…RoboGroup lives. What, you think they’re busy eating crayons? You think they don’t get the same “Millenials hate everything” reports? No, they’ll move when they want to. They’ll move when they see it’s profitable.

So, if there is truly anything ugly about art, it’s that ultimately art can and does die, or is eventually recreated as a super sweet tattoo — that’s just the reality of this situation. And maybe the saddest reality facing most of these firms today is the same reality facing most artists today; they won’t get recognized for their contribution to society until after they’re dead. But what do I know, I’m just an artist.

For even more insights you really must read the masterful commentary from financial planning god and famed art critic, Michael Kitces.

Is There A “Robo-Advisor” Bubble? Wealthfront, Betterment, & LearnVest Raise $95M In Capital In Two Weeks! – Michael Kitces, Nerd’s Eye View