What the BlackRock Deal Means for Advisors and Robos
Asset management giant BlackRock's acquisition of robo platform FutureAdvisor means more digital options for financial advisors and more competition -- and also validation -- for other online-only firms.
As part of BlackRock Solutions, FutureAdvisor will be used to help independent advisors as well as banks, broker-dealers and insurance companies target the mass affluent market.
“As demand for digital wealth management grows, we believe that our combined offering will accelerate our partner firms’ abilities to serve the mass affluent in a convenient, scalable way,” Tom Fortin, head of retail technology for BlackRock said in a statement.
That's good news for advisors, analysts say.
"BlackRock is potentially a very powerful partner for advisors," says Sean McDermott, an analyst covering the digital advice market for New York-based Corporate Insight. "As asset management becomes more commoditized, platforms like FutureAdvisor's frees them up to work more closely with their clients and to attract new ones. They also have less reason to be fearful about BlackRock as opposed to Schwab and Vanguard's digital rollout, which can be viewed as direct competition."
MORE MARKET SHARE?
The FutureAdvisor platform employed by BlackRock absolutely has the potential to help advisors "capture more mass affluent market share," says Sophie Schmitt, an analyst for Boston-based Aite Group.
"It will be interesting to see how strongly BlackRock supports the service and how quickly advisors will embrace it," Schmitt adds. "So far it's been very early innings as far as advisors embracing the B-to-B business model."
As more advisors do add a digital option to their service offerings and lower priced investment management services proliferate, advisors can also benefit from increasing demand for financial planning and wealth management services, according to Angie Herbers, a veteran industry consultant and co-founder of San Diego-based practice management firm Kaleido.
"This allows firms to now charge more for financial planning and for the client to truly see the value in paying for planning work," explains Herbers, whose firm has just released a new white paper on threats to RIA growth.
"The bottom line is that financial planning and wealth management services are no longer the loss leaders," she says. "The BlackRock deal will ultimately provide to advisory firms the ability to work with more clients in the mass affluent market with the power of a well-positioned partner, offering planning and wealth management services for a higher price."
THE HUMAN TOUCH
Advisors also point out that the BlackRock deal underscores the ability of advisors to provide what robos can't -- human guidance and the ability to open doors.
"Main Street RIAs offering the same 60/40 asset allocation services for twice the cost will struggle to justify their fees," says Bill Militello, founder of Militello Capital of Leesburg, Va. "RIAs cannot compete with robo advisors on price or product, but advisors who can provide access to deals, conduct due diligence and articulate a philosophy of wealth creation will win and win big against the robo advisor."
RIAs should focus on how to make their clients money, Militello says. "Seventy-five percent of all millionaires in the U.S. made their millions through private business or investing in real estate," he says. "RIAs must incorporate authentic alternatives in the real economy because wealth is created in private markets."
As for FutureAdvisor's robo competitors, the BlackRock deal gives them a well-financed competitor with nearly $3 billion in annual revenues, but also a confirmation of the staying power of the digital advice market as well as a potential strategic crossroad.
"The proof of concept in this market has been validated," says Corporate Insight analyst McDermott. "We know the assets, clients and demand exist. Now the remaining players have a choice to make: they either go it alone and ramp up for retail growth, which is a tough market, or they exit by finding a partner, an acquirer or conducting an initial public offering. We think the goal of a lot of them will be to be acquired."
For now, the two leading robo advisors appear to have no such plans to change their business models.
Palo Alto-based Wealthfront did not respond to a request for comment, but Celent analyst Will Trout notes that "Wealthfront is completely committed to retail distribution and will not waver from that approach ever. Why should they? Whether it’s books or electronics or automated portfolios, robo selling to the retail consumer is a scale game, and one that Wealthfront -- and Betterment as well -- has the financial backing, technology chops and most of all time, to win."
AUTOMATED INVESTING BELIEF
Trout says he doubts that Betterment is very concerned about competing against FutureAdvisor, whose asset growth, he points out, has stalled, even with BlackRock at its side.
"More likely they see the acquisition as an affirmation of their belief in automated investing," Trout says, "namely that the market for automated portfolio management will keep growing and that there will be plenty of business for everyone!"
Indeed, Betterment Institutional partner Steve Lockshin thinks the FutureAdvisor deal is "great for the industry. It further legitimizes the permanency of this new segment in the industry."
RIAs, he warns, are "busy playing the Grasshopper in Aesop’s fable. I think you will see more of these deals and the future changing for the advice industry much faster than anybody anticipates."
'A BIG BET'
Not surprisingly, other major robo advisors also saw the BlackRock-FutureAdvisor deal as an important milestone for the automated advice industry.
"It’s a great validation that robos aren't a sleepy Silicon Valley trend anymore," says Mike Sha, co-founder and chief executive at SigFig. "The world's largest asset manager is placing a big bet on the belief that it is going to be an important trend for the next decade.
"This is clearly a hot space, and people all the time ask us about M&A," Sha continues. "But we think that the value of the company is going to increase. We are really at the beginning of this trend. Schwab has been doing this for less than a year, Vanguard has been doing this for less than a year, but look at the traction they are already getting. If you read the tea leaves, BlackRock is not going to be the last firm that is going to want this technology. Dozens of multibillion-dollar companies are going to want a solution like this."
The shift from traditional to digital wealth management delivery is "undeniable and the big players know it," according to NextCapital co-founder Rob Foregger. "What is also fact is that there are only a handful of standalone players left in the market and a whole lot of need in the marketplace."
--With additional reporting from Suleman Din.