Over the course of the last few years, the so-called robo advisors have gained significant media coverage in the financial technology (Fintech) space. Invested assets in automated investment services more than doubled from 2014 to 2015 and no Fintech conference has taken place without a newly established robo advisor. Additionally, there have been inflows of hundreds of millions of dollars in venture capital backing into the start-ups behind the robo advisors. Betterment, for example, one of the most famous and largest robo advisors, raised USD100m venture funding in March 2016. We have also started to see the adoption of automated advice by traditional banks and investment managers. This article serves as an introduction to CommerzVentures and our view on the rise of the robo advisors.

1. The rise of the robo advisors from
an investor’s perspective
HEIKO SCHWENDER
FOUNDING MEMBER AND SENIOR
INVESTMENT MANAGER
COMMERZVENTURES
heiko.schwender@commerzventures.com
Over the course of the last few years, the so-called robo advisors have gained significant media
coverage in the financial technology (Fintech) space. Invested assets in automated investment
services more than doubled from 2014 to 2015 and no Fintech conference has taken place
without a newly established robo advisor. Additionally, there have been inflows of hundreds
of millions of dollars in venture capital backing into the start-ups behind the robo advisors.
Betterment, for example, one of the most famous and largest robo advisors, raised USD100m
venture funding in March 2016. We have also started to see the adoption of automated advice
by traditional banks and investment managers. This article serves as an introduction to
CommerzVentures and our view on the rise of the robo advisors.
Founded in October 2014, CommerzVentures operates as the
corporate venture capital fund of the Commerzbank Group.
It backs early and growth stage companies in the broader
financial services and insurance industry. We aspire to invest
in the very best players in a given market segment with the main
objective of generating a financial return. CommerzVentures’
portfolio companies have scalable and attractive business models
which have already shown to be marketable and in need of
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2. industry in terms of access, price, and transparency. It also
addresses the evolution of customer needs and experience.
Moreover, automated investment advice scales through
technology not people, which is something that we always look
for. Consequently, hundreds of millions of dollars were invested
in this space over the last couple of years.
At the same time investing in robo advisors can be challenging
for the following reasons:
•Online customer acquisition and brand building in financial
services is costly and revenues per customer tend to be small.
Robo advisors typically charge somewhere between 20 and
50bps. So building a company with USD100m or more in
revenue would require assets under management of more
than USD20bn which is approximately six to ten times the
current customer assets of leading robo advisors
•Commoditisation and margin erosion: Passive portfolio
management may become a zero cost game, at least for small
investment amounts
•Limited horizontal value chain integration: Typically, robos
provide an appealing user interface, a smooth onboarding
process, and some kind of algorithm for the automated
portfolio allocation and rebalancing but neither has
proprietary products, nor access to large liquidity pools and
trading books. This results in a cost disadvantage and lower
profitability in comparison to traditional players
•Differentiation: There is only limited differentiation in the
business model among many robo advisors
Q: How do you see the market for robo advisors developing?
We expect to see a market consolidation. We are already seeing
robo advisors joining forces with traditional advisors or the outright
acquisition of robo advisors by traditional players. The next phase
would be mergers between robo advisors to achieve scale.
Robo advisors need to move beyond basic asset allocation and
attract clients other than millennials. In addition, they will have
to differentiate from other robos and the offerings of incumbent
offline players. Besides providing an excellent user experience,
differentiation can be driven by product or advisory opportunities:
Product opportunities:
•Access to alternative asset classes
•Active portfolio management
•Customisation and personalisation at the securities level
•Advanced analytics and individual recommendations
Advisory opportunities:
•Holistic goal & financial planning (retirement, insurance, tax)
•Transfer of wealth to the younger generation
•Online interaction with human advisor (chat, voice, video)
Mass-affluent and affluent customers will likely be served by
fully automated advice, offering limited revenue opportunities,
but generating a huge amount of valuable data. We believe
that ultra high net worth customers will be served in a hybrid
model combining automation with access to a human advisor.
But eventually even this might change over time as wealth is
transferred to Generation X and advisory solutions leveraging
artificial intelligence mature.
Q: What applications do you see for robo advising in
banking/financial services?
Banks can leverage digital automated platforms to offer a low
cost investment service. The depth of a solution can of course be
customised depending on the customer segment. Robo advising
platforms can support compliant and optimised investment and
rebalancing proposals based on the customer’s portfolio and
preferences, which implies added value in contrast to today’s
practice where banks often apply a rather generic approach to
portfolio recommendations, even for high net worth individuals.
Embedded in the banks’ infrastructure, these platforms can
generate important data about clients and their behaviour which
supports the overall servicing of both an individual client and
their peer group.
We also see business opportunities for investment banking to
provide services to a bank’s digital, automated advice platform,
by providing investment strategies, proprietary products,
liquidity, or brokerage services.
The robo advisor space is still a young phenomenon, but one
with a strong growth trajectory. Automated investment advice
will likely become the new standard for the mass-affluent and
mass-market and it will also influence other investor segments.
Human advisors remain important, but will likely focus on
sophisticated individual advice which allows them to charge
a reasonable fee. The rise of the robo advisors has just begun.
investment to support further growth. The regional investment
focus of CommerzVentures is Europe, Israel, and the United
States. To date, CommerzVentures has invested in five companies:
•eToro: The world’s largest social investment platform and
active trading community, offering traders easy access to the
currency, stocks, commodity, indices, and ETFs
•iwoca: A leading European player in the market for online
short-term loans to the self-employed or small businesses
•Marqeta: The first developer-centric debit card processing
and management platform which takes significant cost and
friction out of implementing new prepaid card programs
•GetSafe: One of the fastest-growing digital insurance
brokerage firms in Germany, which is shifting the traditionally
offline distributed insurance business to the mobile channel
•Mambu: The cloud-based core banking system for alternative
lenders, challenger banks and micro-finance organisations,
with clients in more than 30 countries to date
Q: Which areas within Fintech are of special interest
to you?
CommerzVentures is a specialist investor as we invest only in
companies in the banking and insurance sector. As an investor
our job is to invest into those companies that will develop into
big businesses in the course of the next 3–7 years. Obviously,
picking the right companies is fraught with a high degree of
uncertainty and risk. We are looking for companies which solve
a real problem in a huge market, scale via technology, and have
a defendable USP. These characteristics allow for an attractive
exit valuation, especially if the company is led by ambitious and
visionary founders. Within Fintech there are a great multitude
of investment opportunities. Having met with hundreds of
companies we currently focus on the following areas:
•New retail banking services and applications
•Trade finance and FX in corporate banking
•Marketplaces and platforms for capital markets
•Big data analytics and artificial intelligence
•Compliance, risk management, and cyber security
•New, tech-enabled products and business models in the
insurance industry
However, we are talking about a very dynamic environment,
so naturally over time we develop new areas of interest, while
others might become less important.
Q: What is a robo advisor?
A robo advisor provides automated investment advisory
and portfolio management services with minimal, if any,
human interaction.
Launched around 2010, the first wave of robo advisors
targeted the millennials segment, specifically tech-savvy and
cost-conscious affluent and mass affluent customers seeking
investment advice. Wealthfront and Betterment, both US-based,
are two of the first companies in this space. These early robo
advisors were focused on providing a great user experience and
product distribution at a low cost.
Building a new consumer brand in financial services turned out to
be very costly. Moreover, incumbent financial service providers,
such as Charles Schwab, Fidelity, and Vanguard, started entering
the market with their own automated advisory services. Therefore,
the second wave of robo advisors focused on white label platforms
that they would license to established brands in consumer
financial services. Some of the early consumer focused robo
advisors followed this trend, pivoting into Business to Business
to Consumer (B2B2C) enablers.
Additionally, robo advisors started to provide more sophisticated
services. In addition to expanding the product offering from mainly
ETFs to stocks and other investment instruments, they started
providing active portfolio management and other value added
features such as tax loss harvesting solutions. The combination of
these developments has led to digitally automated advice becoming
attractive even to wealth management customers.
Q: How large is the market?
According to Bloomberg and Aite Group, approximately
USD50bn was invested in assets in automated portfolios at the
end of 2015, which is just a small fraction of the multi-trillion
dollar wealth management market. But automated portfolios
grew by 210% last year and we expect a massive growth in
assets under management in the coming years. But this strong
growth is also driven by assets allocated to the newly established
automated investment platforms of incumbent players.
Q: What is CommerzVentures involvement in the robo
advisory space?
At CommerzVentures, we are watching this space closely.
The elementary idea of robo advisors is highly attractive to
venture capital investors; it disrupts the wealth management
Commerzbank disclaimer
The views expressed in this article are those of the author, and may differ from the
published views of Commerzbank Corporates & Markets Research Department and the
communication has been prepared separately of such department. No representations,
guarantees or warranties are made by Commerzbank with regard to the accuracy,
completeness or suitability of the data.
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