Roboadvisors — and the banks they once threatened — learn to play nice

Robo-advisors were supposed to make traditional financial planning institutions obsolete. Now some of these so-called disruptors are hoping to play a much different role — ally.

At a private meeting Thursday, dozens of financial services, or “fintech,” startups gathered for the chance to meet face to face with leaders at some of the largest financial institutions in the country, including Bank of America (BAC), Goldman Sachs (GS), JPMorgan Chase (JPM), Citi (C) and BBVA. As the fintech space becomes increasingly competitive, startup founders see the potential in partnering with larger firms that have the customer base — and the capital — to help them scale their business.

U.S. Secretary of Commerce Penny Pritzker, whose office organized the meeting, was on hand to help play matchmaker.

“Large companies have problems and small companies have innovative solutions,” Pritzker told Yahoo Finance. “There’s an enormous opportunity in fintech to grow jobs. That’s why we’re here because our job is to help … the economy grow.”

The setting was appropriate: It was held at online financial planning platform LearnVest’s New York City headquarters, where CEO Alexa von Tobel played host. Von Tobel sold the six-year-old financial planning startup to Northwestern Mutual last spring in a deal valued at more than $250 million. Both Von Tobel and Northwestern CEO John Schlifske agree the merger has been a happy one. LearnVest still operates its independent financial planning business and Northwestern Mutual’s 8,000-strong advisor team has begun using the LearnVest platform with their clients.

“We are an example of actual fintech innovation going well,” von Tobel told Yahoo Finance. “A 158-year-old company coming and acquiring a little startup and 10 months later it going even better than expected

Rocky relationships

The question is whether fintech’s new power couple can help other fledgling firms replicate their success. Over the last year or so, a few major players have tried. BlackRock (BLK) bought robo-advisor FutureAdvisor in late August, licensing its consumer-friendly financial planning interface to banks, insurers and other advisory firms looking to modernize their planning business with a digital-advice platform. (Online investing services, often referred to as robo-advisors, provide automated, algorithm-based portfolio management advice with little to no use of human financial advisors.) In a similar deal announced in early 2015, Pershing Advisor Solutions partnered with online broker Motif Investing to deliver Motif’s trading platform to Pershing’s clients, including 1,600 financial organizations, broker-dealers, registered investment advisory firms and fund managers.  

On hand at Thursday’s meeting was Betterment CEO Jon Stein. Betterment recently partnered with Fidelity in a deal that put Betterment’s investing platform in the hands of thousands of Fidelity’s independent advisors. When the year-long contract ended in December, Fidelity decided not to renew. Stein called it a learning experience.

“It was an advantage for us to get exposure to a broad segment of advisors and they got the word out a lot about Betterment, which was helpful,” he told Yahoo Finance. “I think we both learned a lot from it.”

A Fidelity spokesperson said the brokerage and mutual fund giant decided not to renew the deal because “we determined that relationship was not gaining significant traction with our clients.”

Instead, Fidelity has decided to build its own online advisory platform, following in the footsteps of Vanguard and Charles Schwab (SCHW). It makes sense. Why spend money using someone else’s tools when you can make your own and already have a massive client base ready to use them? And by keeping these services in-house, these firms can continue selling their own financial products and reaping the benefits. When Vanguard launched its robo-advisory business last May, it started out with $17 billion in assets, which grew to $21 billion by the fall, according to Corporate Insight. The 11 largest robo-advisors, including Betterment, held a combined $21 billion in assets as of July 2015.

That’s not to say algorithm-based financial advice is going anywhere. That $21 billion represents 83% growth in just a year. But as Corporate Insight analyst Sean McDermott noted in his report, most of that growth came from an increase in appetite for managed accounts — when firms not only deliver automated “robo” advice but do the dirty work for its clients as well — rather than simply offering advice but no way to implement it.

Since 2013, algo-based advisory services Nestful, Plumvo, and Saveplan — all of which sold some form of low-cost online financial planning services — have gone belly up. LearnVest is a rare success story, although it has used a hybrid advisor strategy. Clients get algo-based advice but also have access to live certified financial planners.

Iterating with the enemy

Despite how things with Fidelity turned out, Stein says it’s important for startups to stay open to opportunities to partner with traditional financial services. “It is not about roboadvisors versus human advisors,” he said. “Ultimately if we’re successful, everyone is going to be using technology like ours. Either they will build it themselves or they'll partner with us to use it. “

At the meeting was also Lenddo founder Jeff Stewart. Lenddo has shaken up the credit score industry, creating a credit score for underbanked consumers in developing nations that’s based on users’ activity on social media sites like Twitter and Facebook.

Stewart is hoping to gain traction with U.S.-based financial institutions looking for alternative credit scoring models to capture tens of millions of consumers who don’t have traditional bank accounts or use credit cards. The incentive for both sides, Stewart says, is simple: Lenddo has the technology to find creditworthy customers and big banks have the ability to extend credit.

“Anyone who benefits from the use of more credit, they’re natural allies for us,” Stewart says. “Almost every bank is trying to be more efficient and faster and we can help with those things.”

There are obvious challenges when a scrappy startup joins forces with a legacy financial institution. There can be a culture clash. LearnVest’s modern Manhattan headquarters are a world apart from Northwestern Mutual’s campus in Milwaukee. A pint-sized dog wearing a cozy winter coat roamed the office during Thursday's event. To engender goodwill between the old and the new, LearnVest and Northwestern Mutual have started something of an interoffice exchange, with engineers and financial planners working from both offices throughout the year. “We’re creating this really vibrant third culture,” Von Tobel says.
Beyond merging cultures, it can be difficult for a nimble young startup to manage the increased regulatory scrutiny that comes with scaling a business. Large financial institutions bring compliance experience and the manpower to the table. Schlifske said the decision to go all-in with LearnVest was based on a simple philosophy: “ You can’t stop [fintech innovation] so you might as well lead it.”

Mandi Woodruff is a reporter for Yahoo Finance and host of Brown Ambition, a weekly podcast about life, love and money.

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