Wealth Management is no longer the preserve of the wealthy
There is still little technology in wealth management. Wealthtech is changing that. The start-ups in this area of fintech build and manage investment portfolios tailored to users’ financial goals, using automated processes. Their digital platforms provide algorithm-driven financial planning services, running with little or no human supervision. The first platforms started after the 2008 financial crisis. Initially, the US led this development. But now the UK, the EU, Asian nations and other countries are major development hubs.
Robo-advisory is the main subgroup of Wealthtech (often the two terms are used interchangeably). Robo-adviser platforms provide automated wealth management services. They require a low initial investment (often as little as $1 or less). They charge low fees – below 50 basis points per year of assets under management (AUM). (Traditional financial advisers charge 100 or more basis points.) And they allow more people to enter the market, mostly young people.
Assets under management in the Robo-Advisors segment were $298 billion in 2017. They are projected to reach $1.79 trillion in 2022 and $3.13 trillion by 2026 thanks to an annual growth rate (CAGR 2022-2026) of 14.99%. The average assets under management per user are expected to amount to $5,141 in 2022. The top five countries will be the United States ($1,23 trillion), China ($107 billion), Japan ($68 billion), the UK ($36 billion) and Italy ($31 billion) in 2022.
Start-ups vs institutions
Traditional institutions are developing their own digital wealth managers. Others are buying, funding or partnering with Wealthtech start-ups (wealthtechs).
In the UK, Nutmeg, founded in 2011, now owned by JP Morgan, is said to have £3+ billion of AUM in 2020. In the US, Wealthfront, an automated investment platform, and Betterment, an online investment adviser, started in 2008. Wealthfront has $21.4 billion of AUM, Betterment $26.8 billion.
In Singapore, DBS Bank, Southeast Asia’s largest bank by assets, launched digiPortfolio, a robo-advice platform that offers investors with at least S$1,000 to invest access to investment services previously only available to wealthy people.
Two-thirds of people aged over 50 prefer face-to-face meetings as a method of getting financial advice. Among younger people, the proportion was only slightly lower at 58%. Just 5% in the younger category and 1% in the older preferred online services.
Wealthtech will not replace all wealth managers, as some fintech entrepreneurs envisage. However, an increasing number of emerging wealthtechs in the space see significant potential in developing the back-end technology solutions for traditional wealth managers. Who spend a lot of their time doing compliance and admin tasks.
Open banking software will help wealth managers handle their operations more efficiently.
Wealth managers are increasingly managing the money of younger people who seem to value sustainability more. According to a May 2021 survey by The Harris Poll, 30% of Millennials often or exclusively want to invest in companies that consider environmental, social, and corporate governance (ESG) factors vs 19% of Gen Z, 16% of Gen X and 2% of Baby Boomers.
Wealthtech is responding to that. Clim8 Invest offers solutions that allow investors to gain exposure to themes which support the UN Sustainable Development Goals (SDGs). Tulipshare empowers investors to play a role in promoting ethical change in global boardrooms via its activist investment platform.
In October 2018, The FCA, the UK financial regulator, launched the Green FinTech Challenge. The FCA wants a financial services market that responds to climate change. The FCA also wants to protect investors from ‘greenwashing’, i.e. ensure that green products are genuinely so.
Wealthtech platforms carry risks. They enable the users to more easily earn – and lose – money. This is particularly true when they offer crypto assets. In 2021, the FCA said that it was unable to oversee the UK arm of cryptocurrency exchange Binance, one of the largest in the world, because of the complex and risky products offered by the exchange. The FCA also banned the sale of cryptocurrency derivatives to retail investors in the UK, while continuing to allow their spot trade.
Some wealthtechs (mis)used gamification to encourage clients to sign up and trade more. In 2021, retail traders members of Reddit’s WallStreetBets forum used the Robinhood online trading platform to push up the stock price of Gamestop, a struggling videogame retailer, sending it from less than $20 per share to near $500 in a short time, causing major losses at hedge funds.
After this event, regulators and finance professionals raised questions about whether it is actually a good thing to make financial instruments easier to trade. To mitigate this risk, the FCA launched an online advertising campaign to drive investors to a ‘high return investments’ webpage.
Wealthtechs make more data available in digital formats. This makes it easier to analyse and provide a better service, but it also increases the risk of security breaches. Considering the significant increase of hacks reported during COVID and the war in Ukraine, cyber security will play a key role in winning new customers, clients and partners.
Wealthtech will grow and focus more on technologies that enable investment opportunities curation via user-friendly platforms that use AI to help investors manage their portfolios, including alternative asset classes such as cryptocurrencies and Non-fungible tokens (NFTs). It will drive investors to want their money to work harder – they will start with an automated service and later, as their wealth grows, move to a tech-enabled advised service.
A growing number of unbanked, i.e. adults who do not have a bank account, especially in frontier markets, will enter the financial services market by opening a wealthtech platform account (as opposed to a digital bank account).
To learn how we can help both wealthtechs and institutions manage strategic opportunities in wealth management: