(Corrects company and banker name in para 12 and 16)
By Mike Kentz
NEW YORK, Jan 7 (IFR) - Social media firms are threatening to up-end the plodding infrastructure for financial services with new applications that aim to rope in an emerging sub-sector of young, tech-savvy “Millennial” consumers, beginning with exchange-traded funds.
Snapchat is understood to be at the front of a queue of tech firms developing Robo-Advisory technology - which uses algorithms to help users develop and implement customized investment strategies for retirement planning.
The technology enables users to click-and-invest directly into financial products via their mobile phone applications.
Online robo-advisers Wealthfront and Betterment have seen interest spike in their automated investment planners in the last two years as Millennial money increasingly rushes into the market.
“The opportunity to deliver financial services for social media platforms is amazing and potentially disruptive, especially in its ability to engage a Millennial consumer set that’s still emerging,” said Reginald Browne, head of ETF trading at Cantor Fitzgerald.
Social media platforms have a perceived advantage over financial advisory firms as they already maintain massive user bases. Snapchat boasts 100m daily active users, whereas start-ups like Betterment had to grow users organically.
The first generation of social media robo-advisers would provide access to exchange-traded funds, say sources - since ETFs trade like stocks on exchanges and therefore are more easily accessible than mutual funds.
“The landscape for financial services has been heavily democratized by the rise of the ETF, now social media platforms have the opportunity to democratize the accessibility and delivery of those products and advisory services,” said Browne.
Spokespeople for Snapchat declined to comment.
Other social media platforms including Instar and Twitter are understood to have been approached by market participants to develop similar services, but interest and development stages could not be determined.
The development is expected not to be limited to the social media space.
Payments application Venmo is understood to be creating functionality similar to online and mobile application Acorns. Acorns allows users to invest spare change from credit card transactions into a suggested portfolio of ETFs, based on risk appetite.
Personal budgeting service Mint is also understood to be forming robo-advisory services similar to Wealthfront and Betterment. Spokespeople for both Venmo and Mint declined comment.
The projects underscore a major shift in the way financial advice and products are provided. Tech platforms are dismantling the out-dated and cumbersome infrastructure for financial services provision that has traditionally been reliant on personal advisory relationships.
Investment product providers say Millennial are focused on self-directed investment methodologies, where a user can control the creation, selection, and implementation of an investment idea.
“The self-directed investor has become a very important focus for the asset management industry. Five years ago that was not the case,” said Dodd Kittsley, head of ETF Strategy at Deutsche Asset and Wealth Management.
Betterment and Wealthfront provide evidence of the trend. Betterment’s assets under management have swelled by 172% over the last 12 months and the firm now manages over US$3bn across 130,000 customers.
Wealthfront manages over US$2.5bn, a 150% rise since mid-2014. The numbers are a drop in the ocean compared to industry leaders like Vanguard, which manages over US$3trn, but providers are now accepting that online and mobile access is the future.
“There’s a broad recognition that people don’t read white papers any more, they want investment strategies at their fingertips - in a quicker, more accessible fashion,” said Kittsley.
Key to the development is the rise of ETFs. A record amount of money flowed into ETFs in 2015 for a second straight year, according to BlackRock, with global assets totaling US$2.98trn at the end of November.
The viability of ETFs as an investment instrument is important because as exchange-traded instruments they are more accessible than mutual funds. Robo-advisory services could not work - or would lose much of their value - if users were not able to trade in and out of products as they can with ETFs.
“Fund managers traditionally have been against the growth of ETFs - they feared it would disintermediate them from the end customer because of its accessibility,” said one sell-side ETF trader.
“But over time they’ve come to understand the product’s value, and you can see it here. It helps us reach end customers we wouldn’t otherwise reach, and grow the pie overall.”
The project comes at a pivotal time for Snapchat. The firm has been rattled by concerns surrounding its ability to create a sustainable revenue model.
Analysts and some advertisers continue to be discouraged by a lack of data and analytics providing visibility into the reach of their campaigns, as well as the high price tag associated with an advertisement on the platform. Analysts say the lack of data is hurting the platform’s ability to establish consistent ad revenue.
In November, Fidelity Investments, the only fund manager to hold a stake in the social media firm, wrote down the value of its investment by 25%.
And the write-down came at the end of a year in which several initial public offerings from high-profile tech firms came in below their last private round valuations - fuelling fears of a tech bubble on the verge of popping - and increasing pressure on private techs to justify valuations.
“The most euphoric period for pre-IPO companies is over,” said Max Wolff, chief economist at Manhattan Venture Partners, a venture capitalist firm focusing on late stage private technology companies.
“The tech market has moved more towards ‘prove it’ than ‘I‘m sure you can do it.’ The pressure will be on Snapchat and many other private tech firms to prove their worth going forward.”
A version of this story will appear in the January 9 issue of IFR Magazine, a Thomson Reuters publication (Reporting by Mike Kentz; Editing by Helen Bartholomew, Stephen Lacey)