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Driving innovation in investment management
Learning from—and partnering with—invest-techs
Invest-techs are driving innovation and challenging incumbents in the investment management industry. Understand the funding trends shaping the global invest-tech landscape and how incumbents can partner with invest-techs as an integral part of their innovation strategies.
- Tapping into invest-techs for innovation
- Invest-tech funding trends
- Moving beyond the robo-adviser model
- Pockets of invest-tech success
- Investment, acquisition, and partnership strategies
Tapping into invest-techs for innovation
Many young, fast-moving fintech startups are dramatically changing established practices and challenging incumbents across the financial services industry. Invest-techs, a subset of fintechs, are driving innovation in investment management, as their creativity is increasingly embraced by investors and investment management firms alike. As invest-techs mature, they are tasked with striking the right balance between collaboration and competition to secure their place at the forefront of the industry.
Robo-advisers that provide digital financial advice based on mathematical rules or algorithms are the most well-known invest-tech. They had their heyday in the middle part of this decade and learned some hard lessons along the way. As a result, many of these companies have shifted to a business-to-business (B2B) model, merged with incumbents, or simply disappeared.
The future for invest-techs appears bright, as investment managers’ continued search for innovative solutions propels the next stage in invest-tech development. One important proof point is the fact that private equity and strategic investors continue to provide funding at accelerating rates.
This report provides an analysis of startup and funding activity, uncovers global trends in invest-tech, and offers suggestions as to how incumbents should position themselves for success as the fintech world continues to evolve.
Invest-tech funding trends
Invest-tech funding reached new heights even as the number of launches fell. Overall funding touched a record high of $2.8 billion in 2018, growing at a compound annual growth rate (CAGR) of 47 percent from 2008. The surge in large late-stage deals for invest-techs, specifically targeting retail investors, has pushed funding to this record level. These invest-techs are developing low-cost solutions for retail investors through community and crowdsourced advice and investing platforms.
While funding touched record levels, annual launches have slowed to single digits from the peak of 81 launches in 2014 to only four occurring in 2018. Only one launch is recorded in 2019.
Moving beyond the robo-adviser model
The steep drop in invest-tech launch activity can be attributed to actions taken by incumbents, coupled with a hyper-competitive pricing climate. Some incumbent financial institutions took notice of the new robo-advice offerings in 2015, and they countered by creating their own digital advice offerings.
Other institutions decided to expand these capabilities through acquisition in order to keep current clients locked into their own digital platforms. These assets were secured for little incremental cost, and the shift opened an opportunity for the B2B robo-advice model, which transitioned these former competitors into service providers.
Pockets of invest-tech success
On the other side of the invest-tech coin stands a solid set of firms that have pushed funding to record levels. Funding activity has gained traction among firms focusing on natively digital products and services. Invest-techs with an eye toward Asia have benefited from having a large population to serve, as well as strong governmental support.
Some of the most interesting activity is happening in the retail invest-tech space, as firms develop solutions beyond robo-advice. The favored retail-focused invest-techs are driving innovation largely in two aspects of the investor experience. The first is providing low-cost access to investment solutions—a theme that has attracted more than one-third of the funding raised by retail invest-techs in both 2017 and 2018. The other aspect gaining ground is the development of community and crowdsourced investment platforms. These invest-tech firms have succeeded in generating considerable interest from private-equity investors by developing community-based investment and trading platforms across asset classes. This peer-to-peer and community aspect of investing plays heavily into the Millennial preference of shared experiences. Sharing stock sentiments, trading ideas, and replicating investment strategies of top investors are just a few ways these platforms utilize community and gamification to keep users engaged.
Investment, acquisition, and partnership strategies
A closer look at the funding data indicates that investors and financial institutions are investing in mature invest-techs. The share of late-stage deals jumped to 58 percent in 2018, compared to an average share of 22 percent for the previous four years. Most of the late-stage funding was directed into invest-techs with at least five years of existence.
Many investment managers continue to look at invest-techs as an effective way to acquire digital capabilities. Twelve acquisitions have already taken place in the first three quarters of 2019. An examination of the acquired invest-techs demonstrates a very similar trend to that of the late-stage funding deals: Invest-techs crossing the five-year existence threshold are prime acquisition targets. In fact, the average age of acquired invest-techs has remained above five years since 2014.
Our discussions with invest-tech firms indicated that partnerships were often being used to attain strategic outcomes. For invest-tech firms, three key considerations seem to emerge for pursuing strategic partnerships: picking the right partner, allocating resources wisely, and securing management buy-in. To ensure a successful integration, an invest-tech firm should evaluate the partnership alignment from a strategic, cultural, and customer perspective.
What’s next in invest-tech?
An exciting decade is ahead as investment managers adopt and deploy new technologies through partnerships with invest-tech firms. These collaborative efforts can bear fruit, provided incumbent investment managers consider the broader and longer-term objectives when engaging with invest-techs. Investment managers should encourage innovative thinking and collaboration with nontraditional partners or face the risk of falling behind on this transformational journey.