By Alexander Jones, International Banker
The wealth-management industry is in the midst of some seismic changes at present. The traditional channels through which money has been managed and advice dispensed are now being decisively disrupted. And as a result, those who are being affected the most—from multi-billion-dollar hedge funds to retail investors managing their own portfolios—are now operating in an almost entirely new landscape. As is the case across the entire finance industry, a lot of the ongoing transformations can be attributed to technology. And more specifically, when it comes to wealth management, it’s wealth technology (wealthtech) that’s chiefly responsible.
According to recent figures from the financial-technology (fintech) analytical research firm FinTech Global, wealthtech is one of the hottest verticals right now within the fintech space. Indeed, funding for wealthtech ventures has surged since 2014, hitting a hefty $4.6 billion across 247 deals in 2018. And this strong trend has continued into first-quarter 2019, a three-month period in which wealthtech companies raised almost $2.5 billion. As such, 2019 looks set to smash all previous records and register another bumper year for wealthtech funding.
Almost $17 billion has been raised by the global wealthtech sector during those five-plus years, at a recorded CAGR (compound annual growth rate) of 49.7 percent. More than 1,300 wealthtech transactions have been conducted in this time, with the average deal size swelling by almost four times, from $4.8 million in 2014 to $18.6 million in 2018. Furthermore, 27 wealthtech deals conducted last year were valued at $50 million or more and collectively raised $2.7 billion—around double the amount raised from the 13 transactions in the same valuation bracket in 2017.
But what exactly is wealthtech? A portmanteau of the words wealth and technology, the term wealthtech refers to those digital solutions that aim to enhance the wealth-management process. Falling under the fintech umbrella, wealthtech is specifically concerned with technology that can improve wealth management and investing, especially with respect to affordability, convenience and accessibility. And it has proven increasingly popular over the last few years as wealth management has had to accommodate major changes, including shifting customer tastes and expectations, greater regulatory responsibilities and compliance requirements, and heightened competition from tech-savvy start-ups that continue to threaten—and indeed, transform—the investment-management business model.
Wealth managers are, therefore, increasingly looking towards technology to enhance existing solutions—or alternatively, create new solutions altogether. The likes of artificial intelligence (AI), natural language processing (NLP), data science, machine learning (ML) and biometrics are now being adopted more widely at one stage or another during the investment lifecycle. At the same time, such technology is also making wealth management more accessible to new groups of investors, such as smartphone-using Millennials and novice retail investors.
This is certainly true when it comes to the most recognisable wealthtech solution to date: robo-advisory. This automated service involves using machine-learning algorithms to determine the ideal investment portfolios for customers, based on their risk preferences. And with a focus on driving down fees and casting the net to a much wider audience than that of traditional wealth advisors, robo-advisors are managing to generate revenues through lower margins and higher volumes of transactions. But while AI has replaced much of the human input in the robo-advisory process, it would seem that many customers within this space still prefer a hybrid solution for managing their assets, one that involves the wisdom of the human touch alongside the convenience of automation.
Nevertheless, automated robo-advisory is set for a bright future. A January 2018 report from Juniper Research found that robo-advisors “under full control of AI systems” will reach $987 billion per annum in assets under management (AUM) by 2022. Fully automated “robos” will represent around one-quarter of the total robo-advisory AUM in 2022, and Juniper projects they will easily outpace the partially automated advisors that rely less on AI. Indeed, Juniper estimates that such robo-advisors will grow their AUM at 155 percent per year on average versus 69-percent growth for the overall market.
Through a growing number of solutions, wealthtech is also enabling a much greater degree of flexibility for customers seeking to better manage their wealth. Micro-investing is one such solution, whereby a customer can save, deposit and invest a much smaller amount of money than has traditionally been the case. Often done simply through the use of a smartphone, micro-investing allows small amounts to be invested through mobile apps, thus eliminating some of the challenges of wealth management, such as minimum-deposit threshold requirements and trading fees. Stash, for example, is a micro-investment platform that allows investments as small as $5 to be made, while Acorns has no minimum-deposit threshold. Acorns also rounds up the amount of each card payment and then invests the difference automatically. Both are available as iOS and Android mobile applications and are especially helping those younger investors with less spare money to improve their saving and investing habits.
Much of the growth in wealthtech can also be attributed to the rapid emergence of challenger banks during the last five years or so. These are newly created, often digital banks that aim to gain market share from the established, traditional banking sector and usually take the form of branchless, mobile banks. Indeed, FinTech Global recently observed that more than one-third of wealthtech funding since 2014 has been committed towards such institutions, with the likes of Monzo, Atom Bank and Brazil’s Nubank among the leaders in the space. KPMG noted last year that unlike their traditional counterparts, challenger banks “aren’t burdened by legacy systems and cumbersome organizational structures such as major branch operations”. And because they only offer a few specialised services rather than the full suite, “they’re also less hampered by regulatory requirements”.
Other wealthtech sectors that are seeing new companies emerge that are now significantly contributing to the advancement of wealth management include digital brokers, which are online trading platforms such as eToro that democratise trading to a potential worldwide user base and simplify the investing process; investment tools, which offer useful investment information, easier access to expert investors and the ability to compare the performance of brokers currently operating in the market, such as NerdWallet; and portfolio management, whereby investors can manage all of their investments and portfolios on one unified platform, such as Addepar.
And with funding for new wealthtech start-ups continuing on an upward trajectory in 2019, undoubtedly more original and creative solutions for wealth management will be unearthed during the coming months and years.