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Cresto Narang Wealthfront.pdf


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3.1.2.2 Porter 5 Forces
3.1.2.2.1 DESCRIPTION
3.1.2.2.1.1 POTENTIAL ENTRANTS
At this point in the market cycle, the robo-advisors market does not appear mature. On the
other hand, if the market proves to work, it is likely that many more entrants are going to
step in. There are a number of elements that must be considered.
There are considerable barrier to entrance, mainly because:





Companies need to invest a considerable amount of money in order to acquire the
technology and the know-how to become a real competitor and get a solid track
record that can appeal investors.
Once a company has a proved track record, a considerable amount of money must
be spent on marketing.
Brand and track record plays a major role in the financial management industry.

At this point in time, many players that are not backed by major asset managers must get
funds from Venture Capitals (i.e. higher barriers to entry).
It must be said that technology allows robo-advisors to scale quite quickly because the
marginal cost per client is extremely low.
From a regulatory point of view, there does not seem to be a specific limitation to potential
entrants. On the other hand, it is likely that, if the market becomes more populated, the
scrutiny from regulators will increase.
One point that might facilitate the entrance of new players is the diversification effect:
investors might prefer not to invest all their money on one only platform but they might
prefer to diversify.
From 1 to 10, the threat from potential entrants ranks at 7 out of 10 and, if the market
proves to work, this threat will become more serious.
3.1.2.2.1.2 SUBSTITUTE PRODUCTS
The main substitute are investment management funds that offer mainly passive funds;
these can allow investors to track indices and optimize their investment opportunities3.
These are large firms such as State Street, Blackrock, J.P. Morgan Asset Management…, very
large companies with considerable investment capabilities. They are a serious threat to

We are considering mainly passive investment strategies because they seem more comparable to the kind of
products offered by robo-advisors.

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