BlackRock and Fidelity are only in the early stages of what is shaping up as a battle royale to become the go-to provider of cheap automated financial advice over the Internet.
The stakes are huge. Morgan Stanley analysts describe how robo advising is an emerging force to provide affordable advice in a $22 trillion wealth pool that features $5,000 accounts and ones with as much as $5 million.
"Advice is ultimately a vehicle to unify control over client wealth," says Morgan Stanley analyst Michael Cyprys.
Although rivals currently dominate the robo advising space, investment behemoths Fidelity and BlackRock are expected to grow quickly. BlackRock's FutureAdvisor now has more than $1 billion in assets under management, while Boston-based Fidelity's digital wealth manager, Fidelity Go, is still getting off the ground, with only a nominal amount of assets. Fidelity has yet to launch a full marketing campaign.
Boston-based Fidelity invested in FutureAdvisor during a $15.5-million funding round in May 2014. It made the investment through a private venture-capital arm run on behalf of the Johnsons, the billionaire family that controls the mutual fund giant, and other company insiders.
A Reuters Special Report earlier this year showed how the Johnson family’s venture capital arm, F-Prime Capital, competed directly with its Fidelity mutual funds for investments in promising start-ups. (http://reut.rs/2dwPY6u)
In the case of FutureAdvisor, the Johnsons’ investment helped the San Francisco-based financial startup build out its technology and catch the eye of BlackRock.
Fifteen months after Fidelity Chairman Abigail Johnson and her family made their initial investment, BlackRock agreed to buy FutureAdvisor and plug it into the world's largest asset management platform.
FutureAdvisor's marketing catchphrase became "Invest like a millionaire for less than you think."
F-Prime Capital held only a 6.7-percent stake in FutureAdvisor and was not in position to affect the sale to BlackRock, according to a person familiar with the ownership structure. F-Prime did not hold a board seat. The venture arm is controlled by FMR LLC, which also owns Fidelity Investments.
Sequoia Capital and the founders of FutureAdvisor together controlled a majority of FutureAdvisor.
Fidelity declined to comment on FutureAdvisor’s sale to BlackRock in August 2015. Fidelity Chairman Abigail Johnson was not available to comment.
Analysts say Fidelity likely was not in the hunt for an acquisition such as FutureAdvisor after agreeing to buy eMoney Advisor several months before the BlackRock-FutureAdvisor deal. Fidelity paid about $250 million for eMoney, a wealth management software company based in suburban Philadelphia, according to the Philadelphia Inquirer.
"Advice is ultimately a vehicle to unify control over client wealth," says Morgan Stanley analyst Michael Cyprys.
QUICKLY GETTING TO BILLIONS
Earlier this month at a Goldman Sachs financial services conference, BlackRock Chief Financial Officer Gary Shedlin said FutureAdvisor will drive greater distribution of the company’s iShares exchange-traded funds and eventually help the asset manager reach a broader group of clients “that we were never able to touch” on a mass scale.
Still, Fidelity could overtake BlackRock next year because it has a built-in advantage that many rivals, including BlackRock, do not have: an online brokerage with 17.4 million retail accounts. Some 96 percent of those accounts don’t currently have any sort of management and Fidelity is ideally placed to woo them over to Fidelity Go.
"Even if they take only a small share of assets that go on the Fidelity Go platform, it's going to be billions of dollars pretty quickly," said Alois Pirker, research director at Aite Group.
John Danahy, head of Fidelity's strategy for digital managed accounts, said the company is not hung up on any goal for accumulating assets. He said it is focused on creating a good customer experience that features a combination of digital automation and some hand-holding from real people.
"We are not crazy about the term 'robo'", Danahy said. "It suggests there are no humans involved."
That being said, a Fidelity online brokerage customer can open a Fidelity Go account in 10 minutes.
Meanwhile, the U.S. robo industry's early leader is Vanguard Group. Its robo business has 60-percent market share with $41 billion in assets. Charles Schwab Corp, which has 7 million fewer brokerage accounts than Fidelity, is No. 2 with $10.2 billion in assets after only 19 months since launching its robo product. Click here for a list of the top U.S. robo advisers: (http://tmsnrt.rs/2hy0z4S)
Robo's allure is rock-bottom fees, which can be less than half what investors are charged in a traditional brokerage setting. A Fidelity Go account would charge total annual fees of 0.35 percent to 0.40 percent, which includes the management fee and underlying fund costs. A taxable account would feature some of BlackRock's iShares exchange-traded funds. The minimum account amount is $5,000. FutureAdvisor charges 0.50 percent and the minimum account balance is $10,000. So far, BlackRock has signed up some big banks as clients, but it remains to be seen how quickly FutureAdvisor can be integrated into their digital wealth management platforms.
U.S. Bancorp said in August it signed a deal with FutureAdvisor, but the online financial advice would not be available to bank clients until the beginning of 2017.
ROBO ROOTS
Bo Lu was a financial hobbyist before co-founding FutureAdvisor in 2010 and doing his part to disrupt the financial advice industry. He spent his spare time trying to make sense of his 20-something friends' investment portfolios.
They had small accounts, but real problems with asset allocation and tax liability issues. The former Microsoft program manager concluded that software, not a financial adviser, could be a cheap solution to balancing their portfolios and selling stocks and bonds in a tax-efficient manner.
Fidelity’s F-Prime Capital agreed and invested an undisclosed amount, giving it a minority stake.
Lu, who is CEO of FutureAdvisor, said the basic premise for starting FutureAdvisor remains intact.
"We didn't want to move assets to software," he said. "We're moving the software to the assets."
As an example, BlackRock earlier this year struck a deal with BBVA Compass, which has nearly 700 bank branches in American Sunbelt states, to offer FutureAdvisor's digital investment management to that network.
"Our approach is to serve our financial institutions," Lu said. "They already have the relations with the retail client." Fidelity, meanwhile, likes to highlight how it is a veteran of managed accounts with $220 billion in assets under management. "And we are not a start-up," Danahy said.
(Reporting By Tim McLaughlin; Editing by Nick Zieminski)
By Tim McLaughlin
