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Wednesday, November 22, 2017

Can an Online Giant Grow This Roboadvisor Seed Into a Tree?

News summary by MFWire's editors

Getting to mass-market scale has been a key challenge for roboadvisors so far. Yet thanks to the multi-level backing of an online giant, one of those robos is tackling that problem in a big way.

Yesterday electronic payments titan PayPal confirmed that select U.S. customers can now link their PayPal accounts to Irvine, California-based Acorns, a mobile-focused roboadvisor that allows consumers to round up their purchases to the nearest dollar and deposit the extra bit into an investment account with Acorns. The roll-out is phased, and the PayPal folks expect to have all their customers ready to access Acorns by early 2018.

OnWallStreet, the San Jose Business Journal, the Wall Street Journal, and other publications all covered the news.

The alliance should not come as a shock to fundsters and other roboadvisor watchers. In April 2016 PayPal led a $30-million series D funding round for Acorns. And according to CrunchBase, PayPal led a $34-million Acorns funding round in November 2016. (CrunchBase estimates that Acorns has raised $96.96 million since its seed round in 2012.)

When PayPal first invested in Acorns in April of last year, the roboadvisor had more than 850,000 users. Now they have more than 2.3 million users (including 1.6 million which "are actively investing at present," the WSJ reports). PayPal, by comparison, had 218 million active customer accounts at the end of Q3 2017. If just one percent of PayPal customers open Acorns accounts, that would increase Acorns' account number by 95 percent.

Given that Acorns encourages tiny contributions and focus on phone-addicted millennials, it unsurprisingly has small accounts. Per its most recent ADV, filed on September 15, the 12 people at Acorns worked with 1.298 million accounts with a combined $528 million in AUM. That translates to an average account size of just $407. By comparison, the biggest independent roboadvisor, Betterment, dwarfs Acorns in staff, AUM, and average account balance. Per Betterment's ADV filed on September 12, the New York City-based roboadvisor has 219 employees working with more than 353,000 accounts with $10.05 billion in combined AUM. That translates to an average account size of more than $28,000, nearly 70 times Acorns' average account balance.

Yet if the roboadvisor game is planting a stake in the ground and building connections with millennials and post-millennials now, when they have little to invest, and keeping them as clients in the years to come when they rise economically, then it is Acorns that has staked out the bigger claim. Even with the September number of 1.298 million accounts, that's more than three times the 353,000 accounts that Betterment has.

And Acorns' business model is geared towards small accounts, as the firm charges a monthly per account fee of $1 (for most investors), whereas Betterment charges an asset-based fee of 25 basis points for its base service. (Betterment also has a 40 bps premium service with an account minimum of $100,000.) At 25 bps across all of its AUM, Betterment would bring in more than $25 million in annual revenue. At $1 per active account, using the September number, Acorns would bring in nearly $16 million in annual revenue. That's about 60 percent of the revenue of Betterment, but with a headcount (which translates into costs) 5.5 percent the size of Betterment.

Yet most fundsters may not be too happy with the rise of either Acorns or Betterment as they provide little room in their models for most fund firms' wares. Like most of their competitors, both roboadvisors build their portfolios out of products from a very narrow list of asset managers. For years Betterment's portfolios were built entirely out of Vanguard ETFs, though in September it added an income strategy from BlackRock and a smart beta strategy from Goldman. Acorns, for its part, builds its portfolios out of ETFs from BlackRock, Pimco, and Vanguard. 

Edited by: Neil Anderson, Managing Editor

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