Robo-advisors are all the rage in Silicon Valley and the press alike these days. Yet for fundsters used to asset-based fees, the valuations of these startups are startling. And for 401(k) industry insiders, the whole robo-advisor craze may seem like deja vu all over again. Is this another bubble?

At their core, most robo-advisors use some kind of computerized model to put individual investors into different portfolios and then manage those portfolios over time. Though billed as competitors to financial advisors, to MFWire robo-advisors look an awful lot like quantitative asset managers, and indeed some of the robos have actually aligned with firms like Fidelity to be able to connect with RIAs and other FAs that have the relationships.

The most valuable robo-advisor currently, at least in Silicon Valley's eyes, appears to be Wealthfront. Its October 2014 round of funding valued Wealthfront at $700 million, against $1.5 billion in AUM. That's a price-to-AUM ratio of 47 percent!

Other robos have smaller price tags, and different price-to-AUM ratios. Betterment's February 2015 funding round values it at between $400 million and $500 million, against $1.4 billion in AUM, translating into a price-to-AUM ratio of 29 to 36 percent. As of its May 2014 capital raise, FutureAdvisor was valued at $75 million, against $600 million in AUM, translating to a price of 13 percent of AUM. And Acorns, as of its April 2015 round, was valued at $83 million, against $25 million in AUM, for a price of a whopping 332 percent of AUM.

Robo-advisors, minus the name, were all the rage in 401(k)s in the 1990s. Most of those startups have since disappeared, one way or the other, yet at least two biggies remain: Financial Engines and Morningstar, both of which are publicly traded. Financial Engines' market cap stood at $2.358 billion at market close yesterday, and as of Q1 2015 it had $109.2 billion in AUM; it's market cap is 2.2 percent of its AUM.

Morningstar is famous for a host of non-robo-advisor businesses, like mutual fund ratings and advisor tools. Yet thanks to offerings like its 401(k) managed accounts, Morningstar had more than $180 billion in assets under advisement and management at the end of Q2 2015. Its market cap at market close yesterday stood at $3.579 billion, which is 2 percent of its AUM.

Or compare robos' valuations to recent asset manager deals. On the high end, earlier this week First Eagle unveiled a deal that values the $100-billion-AUM mutual fund shop at $4 billion, or 4 percent of its AUM. Old Mutual spun off its $214.9-billion-AUM U.S. institutional asset management business, OMAM, in an IPO in October valuing OMAM at $1.68 billion, 0.783 percent of AUM. And last year TIAA-CREF bought Nuveen in a deal valuing the $221-billion-AUM mutual fund shop at $6.25 billion, 2.8 percent of AUM.

Put another way, the robo-advisors' backers are pricing in a lot of growth. To get to Financial Engines' valuation-to-AUM ratio, Wealthfront would have to multiply its AUM by more than 21. They're buying seats at the table for when the robo-advice business takes off. 

Edited by: Neil Anderson, Managing Editor


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