Get ready to say, “Alexa, manage my money.”
Amazon (NASDAQ: AMZN) may soon be disrupting the wealth management sector.
This week, the company reminded the world what a FANG stock is supposed to do – sorry, Facebook (NASDAQ: FB).
The e-commerce giant and cloud services provider crushed Wall Street’s second quarter profit expectations reporting $5.07 per share, more than double the estimated $2.48 per share, and hit every other metric for the Amazon bulls who have pushed the stock up 55% year-to-date. And today, the stock reached a new all time high, hitting a staggering $1,880 per share.
The company is notorious for disrupting and dominating established sectors. Just look at the retail sector where Amazon is often blamed for the “death of retail” as shopping has shifted online and traditional retailers have struggled to keep up, with some declaring bankruptcy or shuttering brick-and-mortar stores.
Last year, it broke into the grocery market when it purchased organic-grocer Whole Foods, spooking other grocery store chains and pushing the sector into a new era of same-day grocery delivery.
Just last month, it made a big splash in the pharmacy market by purchasing PillPack, an online pharmacy that delivers prescription medicines directly to customers.
And now there’s speculation that Amazon might potentially get into the wealth management sector, where it could one day sell customers a super-powered robo advisor or access to cheaper funds. That’s according to a report published Tuesday by analysts at Sanford C. Bernstein & Co.
Bernstein argues that Amazon has certain advantages paving the way for it to break into the finance sector. According to the analysts, the company’s massive customer base—including its 100 million Prime subscribers—and the massive amounts of data on those customers is one of its biggest advantages.
“We think Amazon is well placed to disrupt the industry,” Bernstein wrote, noting that there’s demand for lower-cost financial advice, a service that Amazon could be well-suited to provide.
Amazon wouldn’t be the first retailer to offer money management should it decide to break into the space. Early this year, Overstock.com (NASDAQ: OSTK) announced the launch of a robo-advising platform in partnership with tZERO Advisors for a $9.95 monthly fee.
A potential foray into the sector wouldn’t be without its complications, though. Bernstein believes that the regulatory hoops Amazon would have to jump through would be surmountable, but the risk to the company’s reputation if investors lost money or if its funds didn’t perform well would presumably be a much bigger hurdle to overcome.
“There is a clear risk to the brand. A mistake in fund management is not the same as sending a faulty product,” Bernstein wrote.
Another possible hurdle could be that managing money is a far cry from the online retailer’s core business. But it may not be as crazy as it sounds.
Just consider Alibaba (NYSE: BABA), Amazon’s Chinese rival.
Alibaba’s Yu’e Bao spinoff developed a money-market fund that has become the largest of its kind in the world, accruing 370 million account holders and $211 billion in assets in just four years. There’s also Alibaba founder Jack Ma’s Ant Financial, best known for its Alipay mobile payment platform, which has brought in $14 billion from Chinese and foreign investors. This fundraising implies a valuation of at least $150 billion, which is bigger than the market cap of investment banking giant Goldman Sachs (NYSE: GS).
To get the money-market fund off the ground, Ant Financial used Alipay as a gateway. It has also since developed a robo service that uses artificial intelligence to recommend stocks, bonds, and commodities to customers based on their payment activity.
Bernstein wrote that “This is a model other tech companies could follow,” including Amazon.
While Amazon hasn’t announced any plans to break into the space, there are signs that the company could be targeting finance as it has been reported that it is considering including a person-to-person payments feature in its popular Alexa virtual assistant.
It was also reported in March that Amazon was in talks with a number of banks including JPMorgan Chase regarding setting up a possible Amazon-branded checking account for its customers, a product that would appeal to its younger customers and those without bank accounts.
Still, finance is a heavily regulated industry, which creates a high barrier to entry for companies that want to enter into the space. And focusing on overcoming regulations could distract Amazon from its core businesses where it is facing mounting competition.
But Bernstein believes that Amazon’s enviable status among consumers could give it a strong advantage in an industry that has suffered from a lack of trust among consumers in the years since the financial crisis.
Should Amazon enter the financial space, Bernstein identifies three ways the company could go about it.
The first would see Amazon going all-in on the space using AI and Big Data to directly manage assets. This option would carry the highest risk, and Bernstein believes that the biggest danger with this option is that it would do so well that it would accelerate the backlash against how much user data big tech firms control.
Bernstein’s second scenario would see Amazon giving customers a digital supermarket of options where they could buy mutual funds and ETFs through it but managed by outside professionals. This option could likely see Amazon’s large customer base having significant leverage to negotiate lower fees from asset managers.
The last scenario Bernstein calls a “gamechanger.” Amazon could develop a robo-advisor that could make investment decisions by selecting stocks, commodities, and funds.
Robo-advisors like Betterment and Wealthfront currently have billions in assets, but the industry has relied heavily on expensive advertising to win customers. With Amazon’s massive built-in and loyal customer base, this wouldn’t be an issue.
“This could be a game changer in the economics of robo-advice,” said Bernstein.