The new way of `Armchair Activism` & Diversification in wealth management

  Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.  Armchair activism is on the rise in the investment world and in wealth management. This kind of activism was adopted & embraced by consumers first who changed their consumption habits towards ESG, more social justice and fairness. In the Fall of […]

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A selection of 7 themes on ETFs and robo-advisors

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.  A mini digital detox in August, may reboot and upgrade my operating system. In this post, I am sharing a selection from this year`s posts focused on ETFs (a 50yrs old innovation) and robo-advisors.   Fintech contribution 2020 started with a healthy […]

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Scalable Capital: from Digital investing to Deposit accounts and Brokerage services

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.  Fintech funding and activity for investing solutions is remarkably healthy given the macroeconomic conditions. The Stash ($112million in April 2020) and Robinhood ($280million in May 2020 and $320million in July) sizable funding rounds and the acquisition of Personal Capital by Empower Retirement […]

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The revised pessimistic projection for Digital wealth AUM does not make sense

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

Consulting practices call for 5yr predictions on all sorts of topics. The so-called Robo Advisor subsector in investing has not escaped these studies.

Back in 2016, was when Vanguard was making its first leapfrogging attempts in a space that Betterment and Wealthfront had brought to market. Personal Capital was also shaping up the hybrid version of `digital investing`. Deloitte, CB insights, Aite Group and others were predicting assets under management by 2020 (which at the time, seemed far away for all of us).

Predictions ranged between $ 2.2 trillion and $ 3.7 trillion in assets to be managed by Robo-Advisory services by 2020 and $16 trillion by 2025.

Permit me to take the mean of the range predicted for 2020 (trillions of USD are being transferred from the government to the `people` anyway as we speak) and round it up to $3 trillion for 2020.

2020 – Well we are in the second quarter of 2020 and we are just reaching $1 trillion. Urs Bolt, highlighted the latest report by BuyShares that says we are heading to $987billion. So, we are at 1/3 the 2016 prediction even though the S&P500 is up 30+% and the Dow is up 28+%, since Jan 2017.

 

What is more remarkable is that the current 5yr outlook compiled by BuyShares and based on Statistica data, predicts that in less than 5yrs the AUM will grow x2.4 times, reaching $2.4trillion (Statistica).

Screen Shot 2020-06-15 at 11.13.33Screen Shot 2020-06-15 at 11.13.47

At first site, it may seem to you an optimist outlook. However, it is actually a heavily discounted view from that set out back in 2016 when the sector started attracting more VC investments and incumbents. The first predictions were from 0-$3trillion in less than 5yrs and then from $3trillion-$16 trillion in the second 5yr phase (x5+ times).

And now this study is saying,

let’s cut the 5+ times growth rate in AUM to more than half. And let’s cut the AUM managed over the next 5yrs by 85% (we had said $16trillion and now we say $2.4trillion).

Let’s step back and look into the mirror as if it is 2025. Of course, digital onboarding and automated asset allocation offered currently via ETFs will be 100% an option everywhere and probably free.

The more interesting and meaningful question is about the evolution of the ETF market itself which has been the bread and butter of all the digital investing offerings (lumped under the `robo-advisor` umbrella be it with or without human advisory services); and whether artificial intelligence will actually transform digital investing.

1⃣ Will `robo-advisors` continue to build their businesses mainly using ETFs? Their low-cost core value-add has been interchangeable seen as a win for passive investing and mainly via indices.

2⃣ Will the 12% of the $4.7trillion ETF market (based on 2018 year-end data, see here) grow and to what extent?

3⃣ Will active ETFs grow given the current macro environment? ANTs are just emerging and are a step back from the transparency trend and the zero-commission trend. ANTs are active non-transparent and on average their expense ratio is 70bps. Their position reporting is much better than mutual funds (quarterly). Their cost-adjusted and risk-adjusted-performance will have to be seen going forward. They are currently only 2% of the ETF space (see here).

4⃣  Will artificial intelligence finally take over the asset allocation and the decision of switching between direct indexing or stock picking or momentum.

A few facts to consider:

  1. The ETF space grew sustainably in 2019. Statistica reports $6.18trillion by year end of 2019. That is a 30% increase. Of course, by the end of Q1 2020, the ETF global industry experienced a c. 16% drop ($5.4trillion) which was 100% due to the drop-in asset values. ETFs actually experienced in Q1 net inflows of c. $120billion. These were inflows during the major March selloff. Source
  2. An update on my calculations of the assets under management by digital wealth services points to a c.30% increase (by 2019 year-end), which matches the ETF increase. Source
  3. The actual role of artificial intelligence in all the Digital wealth offerings, is still minimal. Even the large incumbents with sizable digital wealth AUM, like Merill Edge or Vanguard, are still in the initial phase of digital transformation in wealth management. Vanguard actually has done very little on the needed digital integration front. Merill Lynch is probably ahead with its new CEW – Client Engagement Workstation – that integrates market data, client information, account servicing tools and some narrow artificial intelligence tools (chatbots).

For 2025, we should be making predictions of the extent that Artificial intelligence will be making better decisions for my asset allocation than I do, or my private banker, or my financial advisor, or my digital wealth service provider.

What has gone wrong in Fintech that pushed the original projections of $16trillion AUM in 2025, to $2.4trillion?

Where are the trillions of currencies that are being transferred, going to end up?

Isn’t the digital transformation of the mutual fund industry what will happen over the next 5yrs? Whether it is through DLT as an infrastructure of the mutual fund administration or by the tokenization of fund structures or the disintermediation of the European banks who dominate mutual fund distribution or all of the above? And wont all this lead to an exponential growth of the `Digital wealth` AUM?

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Are Robo-advisors with no hedging gear, suitable for the 21st century?

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Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

I`ve been waiting for the quarterly Backend Benchmarking Robo Report, to gain insights into the US digital advisory market that is the largest by many metrics (AUM, # standalone fintechs, # incumbent offerings, years in the market, types of offerings). In the first quarter of 2020 on the `positive` side, we have seen a large funding of $112 for Stash which claims to have crossed the $1billion AUM and 4.5million customers. The race is on amongst standalone robo advisors to build a full stack offering that can include investing and banking services. Stash for example, the micro-investing fintech, has already added a debit card through Green Dot (see more about Stash here). Betterment, Acorns, Sofi, and soon Wealthfront have debit cards for their saving accounts.

On the other end of the spectrum, we have Vanguard the incumbent that has the lion`s share in AUM – $148Billion – and remains a pure investment platform showing no signs of integrating any personal finance tools to its offering.

Investment accounts + saving accounts + debit cards – the new normal for standalone robo-advisors

This is clearly where we are heading to. Robo-advisors like Betterment or Acorns, that were investment offerings first, need to keep their earlier customers who moved their savings to them for a better, cheaper, hassle-free investment service. Other more recent customers may not care so much about robo-advisor performance because their reason to move may have been a high-interest rate savings account, fully digital with a branchless experience. WealthFront for example, is a strong believer of branchless banking and has a vision of Self-driving money.

As I look at the performance comparison from the Q1 2020 performance Backend Benchmarking Robo Report, I am reminded of what Paolo Sironi says repeatedly, `we humans are not rational`. Vanguard has accumulated $148billion AUM without being the top performer over the 4year period of the report. SigFig, Fidelity Go, and Axos Invest (ex WiseBanyan) are the long-term top performers.

What was more striking to me was the top performer during the March stock market debacle. A new kind of robo-advisor, Titan Invest, that was launched just 2yrs ago was identified as the top performer based on its relative performance to its benchmark.

Titan invest, is a different kind of robo advisor that has accumulated $75million and charges 1% in fees. It is an all-equity investing platform (100% equity) whose bread and butter is not low-cost ETFs but individual stocks. It banks off hedge funds and copies some of the hedge fund techniques. However, Titan has no minimum investment requirement and is open to any US retail investor.

Titan filters individual stocks from the major holdings of hedge funds and creates personalized portfolios of 20-30 stocks based on the risk profiling of its clients. Some of its holdings (reported in its blog) include Amazon, Microsoft, and Netflix (up during Q1) and TransDigm and Credit Acceptance (big losers in Q1). In late February, Titan started shorting the S&P 500 appropriately for each portfolio and was therefore able to reduce its drawdown.

The Robo report, reports that in March the Titan Flagship fund returned 8.02%, in a period where the S&P 500 was down 13.79%.

Titan performance

Screen Shot 2020-05-11 at 10.24.44Titan was the only robo-advisor that beat the S&P 500 and its benchmark.

Titan admits that this the first time they use a personalized hedge. Their stock selection combines a quantitative filtering of common hedge fund holdings (based on different measures) and a subsequent fundamental and event analysis.

In their recent Q1 2020 investment letter, they also mentioned that in mid-February they initiated a position in Uber, as they think that the company is in the early stages of a powerful transformation. (see more here)

Titan Invest is a Ycombinator child. No VC investment. $2.5million seed round. It follows an actively managed approach.

The market will show whether active management of this style, pays off. It will also decide whether using hedges to protect portfolios from sharp drawdowns, will become more mainstream.

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Will Stash stay on Craig`s list as a market leader?

Screen Shot 2020-05-04 at 13.00.14

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

The closing of the Motif and the $112million funding of Stash, have sparked interesting conversations. It is clear that there was affection in the market for Motif. Maybe towards the founder or because they started with an innovation that didn’t catch on (Motifs never became a household name) or because they persisted for nearly 10 years or because maybe their timing kept being wrong. Too many pivots whose timing didn’t work out, like launching an offering for advisors and an institutional offering with structured products around 2017. See more in my post from 2 weeks ago, Digitization in the brokerage business is shrewd – Motif investing is closing

Craig Iskowitz weaved a rich coverage of Motif`s story on May 1st with lots of data and back flashes on how Motif was perceived along its journey. 13 Roboadvisors That Might Become Victims of the COVID19 Crisis is a great read for anyone in wealth management. In the last part, he shares a robo-advisor ranking in an effort to start thinking about who will not survive in these markets. The Ezra Group divided 38 providers into to three groups: Market Leaders, Up & Coming, and Watch List.

I`ll just pick on the first group `The Market Leaders` only because it contains Stash who definitely has us all looking at why it was able to raise this large amount of funding (Series F) in these market conditions.

Craig includes in `The Market Leaders` the big old names of Vanguard and Schwab that are pure investing giants, along with micro-investing apps like Acorns and Stash and MoneyLion (which is more focused on banking and lending).

He makes a point about the large number of paying clients that these three apps are serving. 15+ million customers compared to 30 million Vanguard clients. These are numbers as of January 30, 2020. This month we should be getting updated numbers as Q1 2020 from Backend Benchmarking which will definitely show an increase, as we have unofficial evidence already of a spike in account openings across all digital offerings. In the #ItzOnWealthTech Ep. 46: The Mad Rush into Digital Advice with Bill Capuzzi, Bill Capuzzi CEO of Apex Clearing mentioned that they saw a 200% increase in new account opening in March.

For Stash to stay on Craig`s list and to not disappoint their investors, they need to execute well on their re-bundling. They cannot afford to stay only in investing like Schwab and Vanguard. They already started their re-bundling in 2019 and effectively their roadmap to becoming a fuller stack. They used their Series E funding to partner with Green Dot`s Banking-as-a-Service and introduce a debit card. After one year they have acquired 750,000 banking customers and continue to pay up to acquire more (see Tearsheet sources below).

With Lending Tree as one of its key recent investors, they must be planning to add credit to their services. With the dazzling choices of Baas and Saas offerings, there is no secret sauce for almost anything. The trick is the go-to-market strategy that can create network effects. And this is where maybe Stash has a first-mover advantage. Is the optional `Stock-Back` reward program that they also introduced last year something that has actually worked for them?

On May 1, Pulse 2.0 reported that `nearly $10 million Stock-Back rewards have been earned by Stash customers since the launch of the debit rewards program almost a year ago.`

 Stash customers earn `0.125% Stock-Back rewards on all of your everyday purchases and up to 5% Stock-Back rewards at certain merchants with Stock-Back bonuses`.

If all $10million stock-back rewards were earned at 0.125%, then that translates to Stash having processed $8 billion in payments through their debit card. That is an average $10,000 per banking customer per annum. If all purchases were at merchants included in the Stock-Back deal offering clients an average of 2.5% stock-back, then it translates into $400million in payments and around $500 of purchases per customer.                        Is all this worth the Stock-Back patent?

Stash actually keeps investing in it Stock-Back program. They introduced 200 more stocks for 2020. Their digital design allows them to change easily the amount of the reward and offer special deals for certain periods and target different groups of subscribers. For example in May, they increased their rewards for CVS, Netflix, Hulu, Spotify, Disney to stock-back rewards of 2% from the usual 0.125%. (Details here). Their picks obviously are the best way to build customer loyalty, as all these are top choices for most people during the lockdown. They also offered 3% for two food delivery stocks, Seemless and Grubhub only for plus subscription customers.                                                                                         This kind of customizable service is definitely Fintech innovation.

It would be good to know what percentage of Stash customers actually opt-in the Stash Stock-back reward program. And then, what is the actual distribution of rewards that were paid out amongst the individual stocks like Amazon, Starbucks, Walmart, and the diversified fund which is paid out as a reward when you make purchases at merchants that are not publicly traded and on the Stash list.

Are business analytics of Stash customer behavior confirming that once a customer receives a reward in a stock of a company whose products or services they consume, they actually become more familiar with the company and allocate more investment funds to the company? This is the narrative that Stash is floating around as they report that they are seeing an increase in customer deposits. Stash is hinting that there are network effects from the Stock-Back Rewards into their investment business.

It is worth monitoring Stash to see

  • Number of Banking customers growth
  • Average account size growth through follow-on investments
  • The Stock-Back reward program growth
  • Follow-on investments of stocks in the Stock-Back program
  • What value there is in the Stock-Back patent they refer to
  • Any new smart credit offering

Sources-

Tearsheet reports that Stash reached $1 billion in AUM in February 2020, with 4 million customers on the platform (not clear how many are paying any subscription which ranges between $1-$9 per month with $0 minimum). However, only 750,000+ are banking customers.

Nerdwallet April 2020 comparison shows that the customer acquisition cost for Stash is very high. They are still paying a lot to lure new customers.

Screen Shot 2020-05-04 at 12.24.08

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Lockdown & market uncertainty lead to a surge in B2B robo-advisors

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

Digital investing, advice and portfolio management is on the rise. A surge in account openings across the board, is now well documented. The first quarter of 2020 has seen a sizable increase in activity compared to 2019.  TD Ameritrade’s automated investment offering reports an increase of 150%. Betterment has publicized account opening increases of 25%. Wealthfront reports a 68% rise since the market downturn.

Vanguard`s all-digital offering launched in late March, so figures are not available. Schwab has also confirmed the overall trend of an uptick in account opening, but no one has reported AUM figures yet.

The Robinhood debacle surely shifted several accounts to other digital platforms but it also revealed that a large portion of Robinhood`s clients were consumers that have very small amounts to trade (interest in fractional shares) and also use their margin allowance to leverage their plays.

The US market is witnessing an increase in consumer interest to start investing during this downturn. I believe that we will maintain increased levels of users on digital platforms.

Go Digital or Die is not debatable anymore in wealth management. There will be variations of Digital but no more only physical.

Last week, I had the pleasure of attending a webinar hosted by Bambu, the B2B robo-advisor out of Singapore. Bambu has grown since 2016 globally with offices n Kuala Lumpur, Hong Kong, London, San Francisco, and Dubai. They offer all the picks and shovels needed to launch any variation of a Digital investing offering. Their narrative is about creating 21st century investors. They have the backing of Franklin Templeton and have partnered with Refinitiv and Apex.

Since Bambu is not a B2C provider, they embarked on a consumer sentiment analysis by using advanced Google search analytics. Some of their findings show consumer changes and preferences. Naturally, their results have a US bias as it is the largest market in digital advice and investing. During this crisis, there has been an upsurge in searching for Financial advisors.

Consumers are increasingly interested in Long term digital advice.  

Retirement advice, tax optimization and harvesting, are highly sought.

Screen Shot 2020-04-13 at 11.39.35

`Retirement planning` has been strongly trending which is unexpected. People close to retirement prefer traditional channels of advice typically. This trend shows us that there is a reversal and a huge opportunity. It can also mean that consumers realize that there is value in paying an advisor to plan for retirement from early on.

The value of retirement Advice is on the rise.

Bambu`s analysis confirmed (what I knew from fund flows reported by several data providers globally) that there was a huge shift from Fixed income to Equity ETFs. This has resulted in an unexpected inflow into Equity ETFs despite the market downturn.

Eric Balchunas, senior Bloomberg ETF analyst, reported that Vanguard Q1 ETF inflows were at a record $47 billion and this was ALL Equity ETFs, as fixed income ETFs were net $0.

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QQQ the Invesco ETF tracking Nasdaq, also saw peak inflows (via Bambu)

Screen Shot 2020-04-13 at 11.37.46

What Bambu added to the picture, that the hugely positive Equity ETF inflows came also from a consumer shift from investing in individual stocks to investing in ETFs.

Consumers are de-risking (diversifying) from individual stocks into ETFs.   

Screen Shot 2020-04-13 at 11.36.58

Consumers are inquiring about Rebalancing. Digital advice on managing portfolios is on the rise which is a shift from stock picking.

None of the US Robo advisors have announced any firings and some are even hiring analysts, developers, and managers.

Bambu reports a very busy month, which shows that Digital in wealth is not going away and variations will be the norm depending on the geographic region and the area of focus.

Uncertainty and the lockdown has strengthened the B2B robo advisor segment.

Go Digital for Financial advice, rebalancing, tax harvesting.

Recording of the Bambu webinar with lots of graphs and details.

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Mortgages for `Branch-Never` clients is the next re-bundling item  

`Allocating capital and managing the risk on the debt side of our personal balance sheet is larger, more complex, and determines whether we reach our goals or how far away do we end up. This is primarily where we all need advice (human, bionic, hybrid) in the first place, and subsequently in the investment segment of our finances`

This is an excerpt from a post I wrote nearly 3yrs ago The vertical integration of SoFi has the core entry point right! One of the points I was making is that offering mortgages first and then expanding into wealth management, is the way to go during this digital transformation and cannibalization of several financial products. Simply because the value add of advice on the debt side is significant and easier for the end customer to understand.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

Since then, the digital mortgage market has evolved – US players like Roostify, Mojo mortgages, or ElliMae – and several partnerships have been established. For example, Ally Financial partnered recently with digital mortgage disruptor Better.com; or HSBC with Roostify.

Since then, the market reality is that several Fintechs in the investment part (e.g. robo-advisors) have cannibalized products and services, while increasing customer acquisition costs. As a result, they have been forced to expand their initial laser focused offering. Which brings me to the recent announcement of Wealthfront, the digital-only standalone robo-advisor, that plans to add mortgages to its offering.

Screen Shot 2019-12-16 at 10.20.06.png

Wealthfront started on the asset side of our personal finances and is now enriching its offering on the liability side. Sofi did the reverse. Wealthfront, however, has been analyzing data for its clients around home pricings and mortgages, as part of their saving goals towards mortgage down payments. So Wealthfront is not starting from zero. They see demand (they always have been) on customers that are `Branch-Nevers` as they call them.

At the same time, Varo Money the mobile-only banking app (with no banking license yet) has been offering unbeatable free checking and high-yield savings accounts, and plans also to add mortgages and more once they get a banking license. Both Sofi and Wealthfront have added cash and savings accounts.

What a mashed-up market!

From unbundling, integrating, then re-bundling and consolidating. Over and over again.

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Vanguard undercuts Digital only `advisory ` offerings

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019. The Vanguard effect is well known in the ETF market and now it could extend into the digital advisory space. The Vanguard Digital Advisory service is pending SEC approval. Vanguard`s […]

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2 Tug-A-Wars and 3 trends in Digital wealth

Abaka  conversational AI for financial advice I took the rolling escalators to the Gallery at King`s Place where the annual Robo investing 2day conference takes place, thinking about The cash piles that wealthy people are stacking away in the UK market – FFI = Funds Flow Index by Calastone The frustration of the asset management […]

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