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Wealthfront's $1.4B sale could prompt Betterment, Acorns to consider selling

Introduction

Wealthfront Corp.'s sale to UBS Group AG supports our view that fellow U.S. digital investment advisers Betterment LLC and Acorns Grow Inc. might explore sales, if they are not already doing so, given that both entities have built notable customer bases that likely would attract the attention of buyers, as described in our recently published U.S. Digital Investing Market Report.

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Digital investment advisers Betterment and Acorns have both been pegged as IPO candidates for some time. But we think they might consider selling to large incumbents as an alternative exit for their venture capital investors, given the poor stock market showing of many financial technology companies and the deals struck by Wealthfront and Personal Capital.

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Though Wealthfront was rumored to be on the block, it was unclear whether the company would find a buyer and at what price. A Bloomberg article in November 2021 suggested a $1.5 billion price tag, which ended up being very close: UBS has agreed to pay $1.4 billion for the company, per the Jan. 26 merger announcement. UBS is both a well-capitalized acquirer and a logical one. The Swiss banking and asset management giant — which has a large U.S. presence — started its own digital investment advisory service known as SmartWealth, but shut it down in 2018 and sold the assets to SigFig Wealth Management LLC.

Sometimes referred to as "robo-advisers," companies like Wealthfront emerged in the early stages of the recent wave of U.S. fintech startups, offering automated investing services that buy exchange-traded funds and charge much lower annual fees than traditional money managers. Betterment, Wealthfront and Personal Capital Corp. were founded around the time of the Great Recession and quickly became the front-runners among robo-adviser startups when measured by assets under management.

The model proved a tough one to sustain without a sufficient amount of scale, however, and tech-forward industry titans like The Charles Schwab Corp. eventually created their own rival services. Several of the small startups have since gone under. But a seasoned and relatively large company like Betterment still has options. It could stay independent, but if its venture capital backers are eager for an exit, we think a sale would make sense. The underperformance of many financial technology stocks might also dissuade executives from pursuing an IPO.

Betterment is now the last independent among the "Big Three" retail robo-adviser pioneers. Personal Capital closed a deal in 2020 with Empower Retirement, a unit of Canadian life insurer Great-West Life & Annuity Insurance Co. They agreed to a maximum $1 billion deal value, consisting of $825 million up front and an additional $175 million if Personal Capital hits growth targets.

Assuming Betterment is interested in selling, we think it might fetch about $1.7 billion, based on AUM. Betterment's AUM stood at $32 billion as of September 2021, whereas Wealthfront's was roughly $27 billion as of the merger announcement. Betterment received a $1.3 billion valuation in a September 2021 funding round, but a buyer might be willing to pay a premium given Betterment's size and brand recognition.

Acorns is another standout company in the digital investment adviser arena, in our view, but for a different reason: The size of its user base. Acorns had 4.3 million subscribers as of September 2021, and is shooting for 10 million by 2025. That is far more than Wealthfront, which has "more than 470,000 clients," per the Jan. 26 merger announcement. The trade-off, however, is that Acorns has small account sizes, since its app is designed for "micro-investing." Acorns rounds up the amount of a user's debit card purchase and invests the difference in ETFs.

Acorns is also fairly unique in that it charges a monthly fee, whereas many robo-advisers, like Betterment, charge a percentage of the client's AUM. Though Acorns tends to, understandably, highlight its user growth, Acorns did give a hint as to AUM Oct. 12, 2021, saying that "customers have invested more than $9.6 billion with Acorns." The quarterly 13F filings of its main investing subsidiary, Acorns Advisers LLC, also offer insight into its investments. Acorns Advisers reported $5.4 billion of securities for the third quarter of 2021, versus $21.6 billion for Wealthfront Advisers LLC.

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Acorns reportedly wants to pursue a traditional IPO, having scrapped plans to go public via a special purpose acquisition company merger with Pioneer Merger Corp. Perhaps Acorns executives believe that by the time it completes the IPO filing process U.S. stock market volatility will have settled and financial technology growth stocks will be in favor with public market investors. But we think Acorns might take a dual-track approach, considering either an IPO or a merger. The SPAC deal, announced in May 2021, would have valued Acorns at $2.2 billion, higher than Betterment, Wealthfront and Personal Capital.

The forecast for other SPAC deals to close seems cloudy. Of those, Aspiration Partners Inc. is the most relevant to the digital investment adviser discussion. It offers a suite of financial services, including investing, aimed at environmentally minded customers. A few more companies have announced SPAC deals in the "investment and capital markets technology" category, but those seem less relevant, given their heavy focus on securities trading.

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As the Wealthfront and Personal Capital deals show, potential acquirers are likely to be large incumbent banks and life insurers. Our recent research into the top 10 U.S. banks showed that they are competing heavily in the digital investment advisory space. Bank of America Corp.-owned Merrill Edge, Citigroup Inc. and U.S. Bancorp have all lowered the minimum investment required to start an account, and Citigroup and Morgan Stanley have cut their fees. We expect this competition to continue as incumbents seek to court younger investors who are tech-savvy, cost-conscious and do not have as much discretionary income as older generations. M&A would offer a much quicker way to add users than organic growth.

In the life insurance realm, John Hancock and Pacific Mutual Holding Co. have previously shown interest in the space. Pacific Life started a service called Swell and John Hancock created one known as Twine, but both were shut down. As UBS shows, that might mean they are now familiar with the business concept and are still interested in acquiring a digital investment advisor that has been able to scale successfully. John Hancock is a subsidiary of Canadian life insurer Manulife Financial Corporation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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