Robo advisors fared well last year during the fastest-ever bear market triggered by the Covid-19 pandemic. They continued to attract new assets throughout and after it during the market’s swift rebound. But for that reason, 2020 didn’t qualify as a true test for robo advisors and some of the most popular ones are expected to raise capital this year, according to one analyst.
“We believe that the robo advisor business models remain attractive, as we didn’t see a strong selloff during the market downturn in early 2020. In fact, many robo advisors had increased inflows during high market volatility,” said Robert Le, a senior analyst who covers Emerging Technology at PitchBook, a data company focused on venture capital, private equity, and mergers and acquisitions.
Still, as tumultuous as markets were, robo advisors remain generally “untested” because the carnage was relatively short lived and only the first of other eventual phases.
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“The performance of the investments and the operating models of these companies have not experienced major market downturns or high market volatility. We believe a real economic stress testing of these businesses may be needed before they reach widespread adoption,” Le wrote in a March 21 PitchBook report.
In the meantime, robo advisors must continue to grow and evolve and investors will be there to help them.
“To that end, we anticipate capital raises, either from the private or public markets, from Acorns, Betterment, and Wealthfront in 2021,” Le wrote.
PitchBook believes there are long-term fundamental drivers for wealthtech companies. A relatively small group of legacy financial services companies serve a disproportionate amount of assets and customers, which PitchBook views as “a long-term disruption opportunity.” The pandemic also accelerated consumer comfort and adoption of digital wealth management.
Others agree. Venture capitalists (who gave wealth management technology, or wealthtech, startups the cold shoulder early last year) ended up investing a record $3.2 billion in wealthtech companies in 2020, according to Pitchbook.
However, the level of uncertainty at the time meant fewer investments in financial technology companies. Globally, there were 220 venture capital investments in 2020, down from 269 the previous year.
Not all robo advisors require venture capital investments. In December, an RIA launched its own robo advisor called Align Digital, a platform that screens a pool of 500 stocks for environmental, social, and governance, or SRI, factors and builds portfolios for clients with as little as $5,000 to invest.
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.
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