Is wealthfront profitable
The entrepreneurs primarily rely on well-known partnerships. In 2017, for example, the start-up signed a contract with Siemens that gave Prucker and Podzuweit access to around 250,000 employees of the industrial group in one fell swoop. The almost even bigger coup, however, was a cooperation with the direct bank ING-DiBa, through which the start-up alone (to date) has collected around € 330 million in AuM. Erik Podzuweit: “In 2017 we achieved and expanded our market leader position in German-speaking countries. There is hardly a robo advisor in Europe today that manages more than half a billion euros. Besides us, there is actually only Nutmeg of this size. ”A quick look at the robo-landscape shows that the founder is not that wrong. British competitor Nutmeg is still slightly ahead of Scalable Capital, as the company recently announced AuM of one billion pounds. But Nutmeg is only active in the UK market, while the lion's share of Scalable Capital is in Germany. There, the number two among the competitors is probably Liqid. The start-up had cracked the € 100 million mark in May and, according to media reports, was around € 175 million AuM at the end of 2017. Competitors such as the Comdirect subsidiary Cominvest, Quirion, Sutor Bank or Whitebox managed “only” (partly estimated) 80, 75, 65 or 60 million € AuM.
To what extent Munich is better than the competition in other key figures seems unclear. Research by ARD revealed that a weighted portfolio with a medium risk profile at Scalable Capital only brings an annual return of 3.7 percent; the competitors, on the other hand, achieved performances of up to 5.5 percent. When asked about this, the two founders put the numbers into perspective. Prucker: “On the one hand, the portfolio selected for the test was not representative of a multi-asset fund, and on the other hand, the figures were not entirely accurate. If we look at an average customer with a medium risk profile, the return is around six or seven percent. But it's not fifteen percent plus, because it is not our approach to invest one hundred percent in stocks. Our risk management model does not allow that at all. Our aim is to achieve the best risk-adjusted return for our investors. "
This risk management model, which was specially developed by the Munich finance professor and co-founder Stefan Mittnik, is primarily intended to protect investors from large losses. Scalable Capital invests exclusively in passively managed funds, ETFs, which again represent a form of financial automation insofar as they save the human factor compared to their actively managed counterparts and only reproduce certain indices. That keeps the costs low. Think of it this way: What robo advisors are to traditional asset management, ETFs are to fund managers.
But the boom that ETFs have seen in recent years also has its drawbacks. Because with a total of around 7,000 such funds worldwide and an investment volume of around US $ 4.4 trillion (by far not all of them are available in the DACH region, note), an average investor can hardly keep track of this universe. Podzuweit sees this as an opportunity: “ETFs are a very strong driving force for us. Most people don't want to pick and choose from thousands of ETFs. We therefore see ourselves as a kind of ETF concierge: We look for the best ETFs for their portfolio on the client's mandate and consider the risk when weighting the ETFs. "
But although the market development is less decisive for the business success of Scalable Capital than for online brokers, who benefit from a high transaction volume, the stock market rally of recent years has helped the start-up. Because the real litmus test may still be ahead if the markets should go downhill for a long time and investors may suddenly withdraw their money or at least not invest any new money. But Scalable Capital wants to seize the opportunity.
20,000 customers, € 600 million AuM. Even if Scalable Capital is already scratching the billion mark, that is still not enough for the two founders. Because the motto is still growth. Florian Prucker: “Robo Advice is a scale game. With assets under management under € 1 billion, it is difficult to be profitable with the necessary investments in technology. ”However, this question of profitability is an extremely delicate and at the same time the decisive one in the industry. Because the proof that you can acquire enough money with such low fees to cover the necessary investments in personnel, marketing etc. in addition to technology is still pending. With 0.75 percent fees and 600 million AuM, Scalable Capital has annual sales of around € 4.5 million. That is not enough for a start-up with around 70 employees and an ambitious growth plan.
In any case, in the USA, numbers well beyond the one billion AuM threshold are not necessarily in the black. Betterment, for example, manages around $ 10 billion in AuM, but closed its Series E funding round in March 2016 to raise $ 100 million in venture capital again. The same can be seen with the largest competitor, Wealthfront: Eight billion US $ AuM; In January 2018, however, a financial injection filled with US $ 75 million was necessary. Because the US robo-advisors are even cheaper than their European counterparts with fees somewhere between zero (for the first US $ 10,000) and 0.4 percent. And the British still need financial support: Nutmeg wrote a loss of 9.3 million pounds in 2016. Prucker and Podzuweit leaves that cold. Profitability is quite achievable, but at the moment it's about growth: “The question is: How fast do we want to grow, how quickly do we want to become profitable? We could trim ourselves for profitability, but we don't want that at the moment. The growth opportunities are too promising for that. "
Scalable Capital has already been busy collecting money. A total of € 41 million in financing so far, in the last round alone € 30 million. The most exciting investor is a household name: the US financial giant Blackrock. With $ 6 trillion in assets, the Larry Fink-led company is one of the market players with the greatest financial firepower and, in some ways, gives Scalable Capital a seal of approval. Blackrock has been able to gain a lot of expertise, especially with ETFs, so maybe there is also an exchange of knowledge?
In any case, the opportunity is there, because in the future German fintech wants to grow in two dimensions: in terms of content and geography. With the support of Blackrock, in addition to the end customer business, the B2B area is to be increasingly developed, for example by making its own technology available to other financial institutions. Even beyond the area of administration, in other words: you want to be more active in asset advice, which, interestingly, could also include the increased use of human employees.
The company also wants to expand in Europe. Scalable Capital relies on a hub concept: The offices in Munich (around three quarters of the employees work here) and London are to be retained and strengthened, with the presence in Great Britain representing potential for the start-up, especially after the Brexit vote . In addition, the Munich-based company will expand into Switzerland in 2018. In cooperation with Baader Bank, the "home country" of private banking is also to be made accessible digitally. The federal competition in robo advice is still few and far between in view of the private assets waiting to be administered in Switzerland (there are over 30 Swiss billionaires on the Forbes Billionaire’s list alone).
In addition, Italy is on the menu, although the "EU Passport" does not set up an independent organization, but is managed from Munich. In any case, neither of them believe that expansion in Europe will be easy. Prucker: “On the one hand, we have to take into account the complexity that has always existed in Europe in view of the multilingualism and cultural differences. In addition, there is a very special topic in our industry that is very relevant for international expansion: taxes. There are actually no two European countries with an identical tax system. ”So, according to Prucker,“ you have to help the investor. This is done either with the help of a local custodian bank or with tax reporting that we offer. On this basis, the customer can easily integrate his profits into his tax return. ”So it won't be boring at the digital asset manager's office. A possible market correction, expansion across Europe and the wearing of numerous hats from the emotion manager to the concierge will keep Florian Prucker and Erik Podzuweit busy in the future. The most important challenge, however, will be a simple one at first glance: Earning money. Because it remains to be proven that robo advisors can support themselves. But anyone who has so much expertise in managing third-party funds should also be sufficiently familiar with their own finances. Or?
This article appeared in our February 2018 issue of “Artificial Intelligence”.
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