BlackRock's savings app gambit: Build it, or millennials won't come

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BlackRock’s investment in the microinvesting app Acorns underscores an evolution occurring in financial services in its shift toward digital — that gaining scale early will be essential to amassing future client assets.

The world’s largest asset manager is leading a $50 million funding round that will build out the startup’s portfolio stack with new investment options. It also gives BlackRock an inside look into the behavior of next-generation investors, which it said will help fine-tune future releases and broaden its appeal beyond large institutions and pension funds.

BlackRock is joining large retail banks in a trend of investing and developing products that appeal to a younger customer base, latching onto the popular services offered by apps like Acorns, which round up purchases and put the spare change toward savings or investments.

In November, Wells Fargo and JPMorgan Chase launched mobile banking apps that perform similar functions. Their efforts were spurred by the popularity of Acorns and other PFM-focused savings apps, such as Qapital, Digit and Chime. Bank of America offers a similar "Keep the Change" feature on its debit cards.

Could BlackRock be eyeing a larger move into retail markets? Vanguard and Fidelity already offer direct-to-retail products, and some executives wondered if that meant the firm could fall behind its competitors, especially in terms of gaining vital data about the preferences of young investors.

“They want to see what’s happening with next wave of investors and this is a fairly cheap way for them to dip their toes in the pool,” said Joe Duran, CEO of the Newport, Calif.-based wealth manager United Capital.

In reality, there is nothing stopping BlackRock and Acorns from going upmarket to customers with $10,000 or $20,000 in investable assets, or even more, Duran said. “If you can do this with pennies, there is no reason it can’t scale,” Duran says. “Acorns is disrupting the disruptors.”

But, he adds, you have to start with client accounts and the best way to sign on the masses is to make products as cheap as possible. “Acorns is using the same playbook as a lot of these tech companies, like Facebook and Twitter,” Duran said. “You start by grabbing a lot of users with free products that get a lot of attention, and then upgrade the service stack and pick up more of the customer’s wallet.”

The world’s largest ETF provider may be interested in targeting millennials, said Jackie Shroyer, a senior analyst for Corporate Insight. “BlackRock sees this as a golden opportunity to reach millennials, who within a few years will have started entering their prime earning years and emerged as an economic force.”

BlackRock declined to provide specific information about what new offerings are in the works and has not indicated it intends to enter the consumer marketplace. Acorns is also backed by PayPal, and last November it was added to the payments platform to increase its reach.

Acorns now has more than 3.3 million investment accounts and its robo-generated “smart portfolios” cost as little as $1 a month, according to the firm. “They’ve managed to get more eyeballs and consumers than almost anyone else; now they’re figuring out how to commercialize that,” Duran said. “Overtime, they will keep trying to offer more premium services.”

However, Acorns' recent success might not affect firms with different client demographics, said Grant Easterbrook, co-founder of the Newark, New Jersey-based digital retirement plan provider Dream Forward. “Because Acorns is grabbing clients hand over fist doesn’t necessarily mean it is taking any away from core target markets,” Easterbrook said.

The average size of an Acorns account is about $500 and customers are mostly 18 to 34 years old, according to Bloomberg. For comparison, Betterment’s average client age is 37 and average account balance is around $40,000, according to a spokeswoman for the firm.

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“Acorns is mostly just seen as a gateway app to get users comfortable with investing, before they move their assets elsewhere,” Shroyer said. “It is a way to get people started investing with lower stakes," but microinvesting platforms "will need to increase their sophistication to become competitive with the larger robos.”

Which firms will likely be disrupted by microinvesting apps is hard to predict, especially when dealing with private companies, Easterbrook said.

“There’s always competition and everyone is in competition with everyone else,” Easterbrook said. “The bigger question is whether companies that are trying to offer products at very, very low costs and gather as many clients as possible, will be more successful than traditional robos that have less clients, but more assets.”

Banks and fintechs are trying to master the cross-sell. BankMobile, a division of Customers Bancorp in Wyomissing, Pa., and MemoryBank, a unit of Republic Bank & Trust Co. in Louisville, Ky., have launched mobile-only units. BBVA also offers a digital product, Simple, which was developed by a pioneering digital bank it acquired in 2014. Meanwhile, Stash, a microinvestor, announced it would begin offering a savings and checking account starting next year.

"From the digital banking customer experience perspective, having access to this type of tool would be a nice add-on feature for customers with checking and or savings accounts," said Meredith Barthold, senior analyst at Corporate Insight. "Microinvesting services that are easy to set up and offer clients a greater potential return versus a savings account are a logical add-on for such banks.”

BlackRock’s stake in Acorns could also hedge the fund provider’s position should the financial services industry shift away from large family funds, Easterbrook says.

“Fast forward 20 or 30 years and millennials are in charge and investment entry looks a lot different,” Easterbrook says. Younger investors that are growing up with microinvesting apps may be inclined to stay on similar platforms, he suggests. “If the future world is all low-cost, passive lineups, then that’s a major disruption. What happens to the big fund families?”

Even BlackRock’s chief executive, Larry Fink, touted the importance of making products available to small-time investors in a letter to shareholders in the company’s 2017 annual report. He recounted purchasing his first stock, DuPont, at the age of 13.

“We are in a position to achieve these goals by using technology to drive better investing behaviors, by developing new investment solutions and by advocating for better, stronger retirement systems,” Fink said.

This article originally appeared in Financial Planning.
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PFM Fintech Mobile technology Automated investing Joe Duran BlackRock Acorns Wells Fargo JPMorgan Chase