What the Wealthfront deal means for Betterment

Some of Wall Street’s most well-known brands are snapping up digital startups that cater to younger and more tech-savvy investors, and are ponying up billions of dollars to bring them on board.

The UBS Group’s recent $1.4 billion acquisition of Wealthfront Inc. highlights large incumbents’ need to attract the next generation of clients, a group of first-time investors born amid the pandemic and recently labeled the “New Investor” in a report by the Financial Industry Regulatory Authority Inc.

The mega UBS acquisition, combined with the $1 billion deal for Personal Capital in 2020, leaves Wealthfront’s East Coast rival Betterment as the so-called last man standing in the independent robo-advice segment. 

The New York-based startup, which landed its largest capital funding round to date in September, for a valuation of $1.3 billion, could now have a significant bull’s-eye on its back for potential buyers.

A recent study from S&P Global pegged a potential price for Betterment at $1.7 billion.

“Banks want to show off that they’re staying on top of the latest digital innovations, and they’re not going to get disrupted,” said Thomas Mason, senior research analyst for S&P Global Market Intelligence and author of the study. “Two of the three biggest names have already sold, it’s a crazy time in the market right now.”

While Betterment has long said its intention is to file for an initial public offering, current market conditions and growing time horizons could make going public a challenge.

An alternative exit for its venture capital investors could be an acquisition, especially given the poor stock market showing of many financial technology companies in recent months.

“We need to assume that anyone in this space with venture-capital backing is open for sale,” said Scott Smith, director of advice relationships at Cerulli. 

The breadth of Betterment’s business, with options for serving both advisers and retirement plans, could make a combination more complicated, however. In addition to the company’s retail offering, much of the robo-adviser’s recent growth has been attributed to its multiple business lines, including its 401(k) arm, Betterment for Business, and its adviser services platform, Betterment for Advisors. 

“It also presents the opportunity for a potential acquirer to immediately become competitive across several key business lines,” Smith said.

Robo-advice has certainly become an attractive business model for potential suitors because of the stable fees charged on assets under management or through subscription models. Like many traditional advisory firms, digital upstarts can also generate reliable and recurring revenue, and that can be eye catching to buyers, who can then value the company on concrete metrics.

“Everyone thought the valuations were too high, and that firms wouldn’t be willing to pay up for a robo-adviser,” said Alois Pirker, director of Aite-Novarica’s wealth management practice. “Wealthfront proved everybody wrong. Of course, other investors are chomping at the bit, but the challenge will be finding someone who’s willing to pony up.”

Digital investment firms like Betterment and Wealthfront are opening the door to younger, mass-affluent investors, who have the potential to inherit a whopping $84.4 trillion worth of assets in the coming decades. According to a recent survey by Penny Hoarder, two-thirds of today’s app users started investing during the pandemic, and more than half plan to invest more money online this year than they did in 2021.

“A sale actually makes sense,” Mason said, adding that the price tag could be as large as $2 billion. “The big banks are lowering fees and investment minimums, and Betterment would be an easy way to jump-start those operations.”

In recent months, Bank of America-owned Merrill Edge, Citigroup Inc. and U.S. Bancorp have all lowered the minimum investment required to open an account, according to S&P Global. Both Citigroup and Morgan Stanley, among others, have cut fees. 

“Betterment has been the largest independent digital adviser in the space for quite some time,” Betterment spokesperson Danielle Shechtman said in an email. “We are in a fantastic position and have more opportunity than ever to help serve our customers on our own path across multiple business lines.”

Betterment’s revenue reportedly is nearing $100 million, according to some estimates, and the company has brought in strategic hires to accelerate the next chapter of growth. Most notably, it replaced founder and long-time CEO Jon Stein with Sarah Levy, a former executive at Viacom Media Networks with experience building global brands. Levy took the reins at the end of 2020.

The company added 56,000 new clients to the platform in the first quarter of 2021, the first full quarter after Levy took over. In the first three months of last year, client net deposits were over $1.5 billion, up 118% year over year.

“The recent acquisitions in the space encourages us even more about the enduring value we are creating,” Shechtman said.

The S&P Global report expects the M&A competition for startups to continue, as incumbents seek to court younger investors who are cost-conscious and don’t have as much discretionary income as older generations. The upstarts offer considerable potential to reach new swaths of investors. 

Craig Iskowitz, founder and CEO of consulting firm The Ezra Group, said Betterment is in a similar position to Wealthfront and “should sell.”

“Another bank or asset manager might be interested in buying it for the same reasons as UBS bought Wealthfront — for distribution and for replacing and expanding their digital footprint,” he said.

If Betterment remains a stand-alone company, continuing to expand its offerings to retail investors and advisers will push revenue and differentiation. Its recent acquisition of cryptocurrency manager Makara Inc., for example, marked the company’s first major foray into digital assets.

Betterment has made it clear under Levy’s leadership that it’s prioritizing growth, and the platform has been busy rolling out new offerings. Betterment for Advisors launched custom model portfolios in February 2021, while leveraging Betterment’s portfolio management tools, and last June the company announced that it had tapped RIA in a Box, RightCapital and Wealthbox to provide breakaway RIAs with a predetermined tech stack. 

Whether or not Betterment decides to stay the course and raise future funding through an IPO, along the lines of founder Jon Stein’s original vision, remains to be seen. Most industry watchers agreed an eventual sale to the highest bidder simply can’t be discounted either.

“Wealthfront for years was the ‘anti-adviser,’ so the UBS deal just shows you that everything is a working assumption,” Pirker said. “Once the numbers are on the table and it’s lucrative — it’s a different story.”

The post What the Wealthfront deal means for Betterment appeared first on InvestmentNews.

Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.

Andrew Vincent
Andrew is half-human, half-gamer. He's also a science fiction author writing for BleeBot.
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