Deals

UBS snaps up digital disruptor Wealthfront

The COVID-19 pandemic has accelerated the digital transformation of the wealth space. UBS’s acquisition of Wealthfront is another example of how valuable digital services are post-COVID-19. Sergel Woldemichael writes

The price for Wealthfront sits at $1.4bn, making it the most expensive robo-advice acquisition to date.

The Coronavirus Crash was a big test for robo-advice, as the concept had yet to endure a market crash. But many robo players have endured and grown, reaching record customer numbers and assets under management (AuM).

Traditional players have decided to take a shortcut to a robo-advice proposition via acquisitions and partnerships, as opposed to the time-consuming route of an in-house approach. GlobalData’s 2021 Global Wealth Managers Survey found that among US wealth managers, 84% believe their market share will be eroded by robo-advisers in the next 12 months. Incumbents are well and truly aware of its value; now they are putting their money where their mouth is.

Wealthfront was one of the leading standalone operators, amassing over $27bn in AuM and nearly half a million customers since the company was founded in 2008 as KaChing. Its service is multi-faceted, with the company continually developing its range of products and services to meet mass affluent demand. It offered ESG investments early on, as well as cryptocurrency access and credit and deposit services.

For UBS, this is a quick way to target the mass affluent in the US – who are predicted to account for over $47trn of wealth in the US by 2025 as per GlobalData’s Wealth Markets Analytics – with a well-rounded offering.

Profit in robo-advice?

As much as the acquisition reinforces the notion that robo-advice is here to stay, many standalone players are yet to become profitable, including Wealthfront. Cost of customer acquisition remains a big issue, even for players that have reached AuM in the billions of dollars.

Therefore, if major players such as Wealthfront and Nutmeg are open to being bought, it does not leave much hope for new robos looking to launch or current standalone players. In addition, many robo-advisors have closed down over the years. This includes UBS’s SmartWealth, which failed to attract its target market in the UK due to pricing and brand relatability issues.

The long overdue technological transformation of the wealth industry and the increasing client demand for automated digital services has pushed traditional wealth managers such as UBS to adapt. 2021 saw JPMorgan Chase UK acquire robo-advisor Nutmeg, while the year ended with Santander announcing a partnership with technology specialists SigFig on a robo-advisor. Such moves are a smart way for the old guard to attract the younger generation and mass affluent individuals. Wealthfront will benefit too as it can leverage the prestigious UBS brand. Expect other wealth managers to take a similar approach, purchasing robo-advisors as opposed to building a service in-house. Likewise, more robo-advisors will be looking to tie up with an established financial powerhouse in order to ensure their longevity.