Last Thursday I had the great privilege of having been invited by the remarkable Laurent Haug to present a snapshot of our vision of the new emerging universe of “digitally native finance” at the wonderful Lift12 conference in Geneva. Twenty minutes is not a long time (and thank goodness Laurent indulged me with a couple minutes more) to convey both the context and the substance of what we believe to be a fundamental shift in the paradigm of the financial services industry, but I hope I was able to give at least a good high-level overview. Most importantly, I hope I was able to convey the excitement we feel at the vastness of the opportunity and the win/win/win (for the customers/companies/economies) available to those who embrace the opportunity for technology-enabled disruption in financial services by introducing them – however superficially I’ll admit – to just a handful of companies who are at the vanguard of this wave of change.
For those that are interested, my presentation and video (updated!) is below:
For those that are interested, here are links to all the companies mentioned in the presentation, those in which Anthemis is invested are marked with an asterisk. Clearly this is just the tip of the iceberg and there are many, many more companies and entrepreneurs and venture stage companies now focusing on creating the future of financial services – a veritable Cambrian explosion of innovation: (note: this selection is somewhat random and driven by a desire to show an interesting / representative cross-section rather than trying to pick out the most important or most successful companies in the space)
As I said in my presentation at Lift12, it is an incredibly exciting time in this space, and it is tremendously satisfying to see all the work we’ve done to position Anthemis at the heart of this opportunity space starting to bear fruit. Working with the amazing entrepreneurs and companies in our portfolio is a privilege and we are constantly impressed by their vision, focus and energy which is infectious. And beyond our existing portfolio, we have an incredibly strong and varied pipeline of new companies we hope to bring into our ecosystem over the next year or so.
You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete. – Buckminster Fuller
A billion dollars isn’t cool, you know what’s cool? A trillion dollars.
A bit more than a year ago, my friend Fred introduced me to John Prendergast who was in the very early stages of conceptualizing a platform called Blueleaf to help people better manage their savings and investments. As Fred knew, this kind of thing is right up my alley and so I set up a call with John to learn more about his plans.
As many of you know, for over a decade – since first discovering the enabling power of the internet and Moore’s Law – I have been very excited by the prospect of revolutionising the way 99.9% of people manage their personal financial balance sheet. (With the first 80% of this revolution being simply to help people recognise that they have a personal balance sheet and that it should be considered holistically and in the context of each person’s circumstances, constraints and aspirations.) I called this PALM – personal asset-liability management (but am not so naive as to think that this is the nomenclature one would use to popularise the notion…unsurprisingly most folks aren’t super aware – or inclined to be – of the importance of robust ALM…)
Indeed of all the various innovative ideas and companies I’ve looked at and invested in over the past decade, this concept of PALM is the one that actually lies in the Paul Graham vector of solving problems you encounter yourself. Indeed, I cannot wait to have a robust, networked, intelligent asset-liability management dashboard to help me manage my family’s increasingly complex balance sheet. And for once, I am also in fact part of the key or core demographic for this type of product (which is not often true!)
Although I would argue that people should start managing their personal balance sheet from the time they enter higher education or the workforce, the reality is that it isn’t until the 30s and 40s that real complexity typically starts to creep into the balance sheet: mortgage(s), other secured and unsecured loans, multiple savings and investment accounts including pension plans and other tax-driven structures, more complex compensation mixes (including equity and options), children, and the awakening realisation that they can’t count on the state or their employers to secure their financial future.
Adding to this complexity is the fact that financial products are almost always sold (and bought) in isolation – with at best limited regard to the consumer’s overall balance sheet – and choices are often driven by non-financial considerations (changing jobs, marriage, divorce, etc.) You might expect me at this point to go off on a rant about how awful this is and that our financial institutions are failing us by cynically selling us individual financial products rather than holistic financial solutions and that this needs to change. Surprise! I don’t have a problem with financial institutions selling products. That’s what they do. Worrying about that is like wishing the sky was a different colour than blue. Misdirected energy.
Ironically, most financial institutions actually spend a lot of time, money and energy pretending to and trying to convince you that they are looking at you “holistically”, that they are looking at the big picture but in order to do so, they need to control more or ideally all of your balance sheet. In other words, sell you more products. Well I don’t know about you, but whether your balance sheet is $50,000 or $500,000,000 – I think it is pretty intuitive that (a) it’s pretty much impossible to do all your financial business with just one institution and (b) even if it were possible, it is highly undesirable to do so. Pre-2008 this was obvious to me (as an ex-banker and someone with high financial literacy); post-2008 I think this is increasingly obvious to everyone.
The solution in my mind was an intelligent (online) wealth management / ALM platform that would allow individuals (and families or other self-determined groups) to aggregate all of their financial commitments – assets, liabilities, cashflows – and then allow them to risk manage (scenario analysis, simulations, rebalancing, etc.) and optimize their personal balance sheets according to their changing needs and circumstances. Mixing a high level of automation in terms of the basic record-keeping, data management and transaction processing with an intelligent user-interface allowing the user and/or their advisor(s) to make well-informed, contextual decisions. In essence, a meta wealth management intelligence layer that put the information advantage squarely with the individual, where it belongs.
I dreamed about building this…
So I remember when John started to describe his vision for Blueleaf to me on that first call, he had me at hello. The vision, the product, the approach all aligned with my vision of using 21st century technologies to bring institutional strength risk management tools to individuals. A few months of refining, learning, due diligence and progress later, and I was convinced that John and his team could deliver on their vision and I was delighted for Anthemis to become the lead seed investor in Blueleaf just in time for Christmas 2010. (And the cherry on the icing on the cake is that now I have a good reason to visit the great city of Boston every 2-3 months or so.) As you might imagine, building the technology to deliver this vision is not trivial and it’s been impressive to see them bring Blueleaf to life.
In closed beta since last fall, and by focusing on providing financial advisors with an amazing platform to help them help their customers, Blueleaf has (very quietly) already gathered over $1 billion (yes, billion…) of assets on the platform, including a significant number of multi-million dollar accounts. Often when people hear this, they are surprised – why would advisors trust a new start-up like Blueleaf with all the details of their clients net worth? I think it is relatively simple. First and foremost, because by doing so, they can derive real – measurable and material – value for their customers by using their platform, and secondly because it makes much much more sense for individuals and independent financial advisors to share a complete view of someone’s finances with an independent 3rd-party platform provider like Blueleaf than with any individual financial institution. Â In other words, it makes advisors look like rock stars and gives individuals a quantum upgrade from the still all-to-common wealth management user interface of a kitchen table covered in account statements… And the wealthier and more sophisticated (and older!) you are, the more you are likely to realise this is true. There are very good reasons to have multiple banking, insurance and broking relationships. The problem is that today, to gain the advantages of multiple relationships one has to pay a real cost in increased complexity that arises from having to manually manage and aggregate these accounts.
And just in case there are any private bankers reading, I think you will agree – if you are honest with yourselves – that almost none of your clients have given you all of their assets to manage. Is it because they don’t trust you? Well yes sort of, but (hopefully!) not in a toxic way. Let me explain: they know (and know that you know, that they know, etc.) that you need to sell them products. Perhaps you can take a long term view of this (which is good) but sooner or later, you need to book some revenue against each of your client relationships. Like scorpions, this is your nature. They also know that having all your eggs in one basket is generally not an optimal strategy. And they know that you might not be at that institution forever and – in a bit of good news for you – their relationship is almost certainly more with you as an individual than with the institution (despite the enormous sums your firm spends on brand marketing.) Hell that’s one of the reasons they have assets spread amongst 4 different banks: some of those assets followed you with your previous career moves…
In fact, I am convinced that the most enlightened private bankers, insurance brokers, financial advisors will embrace and celebrate a platform like Blueleaf as it will make their customers more intelligent, better informed and less paranoid and allow them to do their jobs better and build even stronger relationships with their customers. Of course the weak ones – who really add no value other than shuffling reports around and hoarding information – will hate it. But the clock is ticking on them in any event…
John’s vision for Blueleaf is to have $1 trillion of assets on the platform in the next 5-7 years. Yes TRILLION. Think that’s crazy?Think again:
That’s 1 million accounts of $1 million each (c. 34% of US HNWIs, 10% of Global HNWIs)
or c. 9% of US HNWI’s investable assets of $10.7 trillion (or 2.5% of global HNWI investable assets)
or 10 million accounts of $100,000 each (c. 25% of US mass affluent households)
Don’t mistake ambition and vision for hubris: it will take a lot of hard work and an amazing product and value proposition to get there, but the size of the market opportunity is clear. Equally importantly, I think the time is right to introduce a Blueleaf approach to the market: a combination of shifting demographics, increasing familiarity and comfort with web-based financial management products and the fundamental shift in private investor mindsets in the wake of the global financial crisis are all aligning to drive an increasingly holistic, transparent approach to investing and wealth management. Some of the key learnings from the 2010 World Wealth Report back this up:
Post financial crisis, HNW investors are now much more engaged in their financial affairs. HNW clients are re-evaluating their current wealth management provider relationships and moving assets to firms that can clearly demonstrate a more integrated approach to meeting their needs.
Three unequivocal demands HNWIs are making of their wealth management firms today are:
ÂƒSPECIALIZED ADVICE: As clients become more educated about their own investment choices, they increasingly expect â€˜Specializedâ€™ or â€˜Independentâ€™ÂƒinvestmentÂƒadvice, and are re-validating advice from their Advisors/Firms through other sources, including peers, the Internet, and other research alternatives. They also expect the advice to be aligned with realistic and appropriate goal-setting, based on their actual risk profile.
ÂƒTRANSPARENCY AND SIMPLICITY: HNW clients want increased â€˜Transparency ÂƒandÂƒ Simplicityâ€™ and â€˜Improved ÂƒClientÂƒ Reportingâ€™ so they can better understand products, valuations, risks, performance, and fee structures. HNWIs are reviewing product disclosure statements and investment risks before even conferring with their Advisors. They also value better reporting and more frequent updates after being blind-sided during the crisis, when they lacked a real-time view of what was happening to the value of their investments. And increasingly, the type of products they seek out are the ones they can understand.
ÂƒEFFECTIVE PORTFOLIO AND RISK MANAGEMENT: The vast majority of clients see â€˜Effective ÂƒPortfolioÂƒ Managementâ€™ and â€˜Effective ÂƒRisk ÂƒManagementâ€™ as important after the crisis. As a result, they increasingly want and expect scenario analysis on proposed allocations and products that is aligned to their individual goals and expectations, and in-depth research around all types of products so they can better understand the risks. For instance, many wealthy clients are very concerned about their exposure to markets and want to limit their downside risk. At the same time, they know they need to diversify and have global exposure, particularly to fast-growing markets. As a result, they want evidence through risk-scenario analysis to facilitate investment decisions that meet their goals while remaining aligned with broader volatility and risk-appetite limits.
These are a pretty darn good articulation of Blueleaf’s mission statement; it’s great to see this kind of independent confirmation. Now enough talking and back to work. Lots to do and $999 billion more assets to bring on to the platform. (And if you’re reading this from the US and are an early adopter type person or financial advisor, please request an invite. I think you’ll like it.)
I do have one complaint however: Â I just wish they’d hurry up and launch in Europe too!
Betterment ticks the box on so many of our investment themes and fits so well into our vision of digitally native 21st century financial services that they had us at ‘hello’â€¦but the clincher was the amazing team and impressive execution to date.
When asked, I often tell people that we invest in the “emerging Apple’s of financial services”,Â ie that we look for companies who use technology to create powerful, intuitive, user-friendly customer experiences by essentially abstracting complexity away from the user (not ignoring it, but managing it – with skill and dexterity – behind the scenes) rather than exposing it in all its glory to customers with the implicit goal of profiting from then managing (exploiting?) their confusion and disengagement. Â Of course the Apple analogy is not perfect but probably can’t be beat in terms of a pithy soundbite summary of our approach.
So with this in mind, think of Betterment as having a Jobsian approach to savings and investment:Â combining a intuitive and powerful user interface with a robust back-end execution platform, Betterment allows anyone to quickly, easily and without mystery manage asset allocation and risk budgeting using a simple, multi-asset class portfolio.Â No hassle, no time wasted, no blizzard of trade confirmations.Â The first time I saw it, I immediately wanted to be able to manage all my cash balances using their platform.Â (Unfortunately they are currently only operating in the US so not super-practical for me personally but you can bet we’re keen to help them expand their horizonsâ€¦) Say goodbye to the money market account.Â Indeed, if you are based in the US and have a bunch of your savings tied up in money market accounts or CDs, you should definitely take a very serious look at replacing these with a Betterment account.Â Have a look at their product tour:
But the most exciting thing about Betterment is that they have only just got started and it’s scary (good) to think what Jon, Eli, Kiran and Anthony, can and will do over the next couple years.Â And it’s a great fit with our nascent but growing ecosystem and we look forward to helping them work with other great digitally native financial firms like BankSimple, Blueleaf, FX Capital Group and others as they grow their business in the months and years to come. Â And the icing on the cake is getting the opportunity to invest alongside guys like Rob and Eric at BVP who bring a lot more to the table than just capital. Â Congratulations guys and thanks for inviting us along for the ride.
And was just thinking this might be the right track for their inaugural global marketing campaign…