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The Current State – and Future – of Digital Wealth

The world of financial technology has recently experienced an outburst of development, driven by rapidly improving technology and the maturation of the millennial generation.

Having grown up alongside tech superpowers like Google and Apple, millennials expect an advanced digital experience across all the brands they interact with. Financial services are no exception. 

Traditionally, banks don’t adapt quickly to new technology. As a result, numerous startups (ranging from payments to investing to savings) have entered the fintech world with hopes of carving out a place in the future of financial services.

Within digital wealth management specifically, a number of new entrants are targeting the future customers of wealth managers, enabling investors with smaller accounts – mostly younger investors – to digitally invest their money in ways once restricted to investors with higher levels of assets using traditional channels. As we look to the future of wealth management, fintech seems on the cusp of revolutionizing the way the incumbent banks and wealth managers operate their wealth management businesses.

A few startups in digital wealth have already made a significant impact in obtaining assets. Two of these firms are robo-advisory leaders Betterment and Wealthfront. As of November 2015, these two firms managed $3 billion and $2.6 billion[1] in assets, respectively. Their combined total of $5.6 billion represents a fraction of the total pool, but for two companies that began in 2008, they’ve made a noteworthy impact, and they’re only expected to grow.

A number of fintech companies, specifically many of the early players, have capitalized on the opportunity to transform traditional investing into the digital space. For example, TradeKing, the 10-year old online brokerage firm – ancient in fintech years –has a very low initial deposit requirement ($500) and annual fee (0.25 percent) and has grown to manage roughly $3 billion[2]. A business with a similar model, Robinhood, operates under the premise that an online brokerage has significantly less overhead than a traditional one. It offers free stock trading and free real-time data. Robinhood’s AUM is vague; however, they have gained $66 million in funding[3], so there is a strong feeling that this business model will succeed.

In addition, a number of firms recently entered the market with very unique ideas that further challenge the traditional investment model. Millennials turn first to their smartphones, and companies such as Acorns have launched mobile-only investment platforms targeting millennials. Acorns’ most prominent differentiator is allowing users to invest spare change directly into their accounts by rounding up daily purchases, in addition to allowing recurring and lump-sum investments. In an attempt to become the preferred platform of millennials, Acorns is free for college students to use. This method seems to be working: Acorns grew to 650,000 users, who in total saved $25 million[4] in less than a year after Acorns’ August 2014 launch.

Also targeting smaller accounts, and therefore younger investors, is an app called Stash. Stash enables users to invest in ETFs with as little as $5 (purchasing fractional shares). Stash also appeals to ethical investors, as it allows users to choose investments suited to their beliefs and interests with fund options such as “Clean and Green” and “Global Citizen”. Stash entered the market in fall 2015, and it is too early to judge its performance. Over a longer period, it will be interesting to see if its methodology satisfies only a small niche or if the masses find it appealing.

While fintech firms are responsible for most of the digital innovation, some traditional wealth managers are making progress, as well. UBS won Private Banker International’s award for Most Innovative Digital Offering in 2015[5] when it released a “Wealth Management in Asia” app. The app provides recommended portfolio realignments and curated news articles and focus pieces. Thus, it covers timeliness, custom advice and mobile accessibility, which are all important characteristics to wealth clients today. UBS plans to release a similar app in North America, and it will be interesting to assess its impact, as an app that utilizes many appealing aspects of fintech offerings coming from a traditional firm with a longstanding reputation.

Another traditional firm, Charles Schwab, jumped into the robo-advisory game and amassed over $4 billion in assets under management in less than one year[6]. This success has caused other wealth managers to start taking the robo-advisory movement more seriously. It is widely speculated that all incumbent wealth managers will offer some form of robo-advisory in the near future, whether their own, like Schwab, or a white label solution.

Judging from the early success and the potential to greatly influence the millennial population, fintech firms are poised to bring substantial change to wealth management. Some believe the robo-advisory movement creates more of a risk for incumbent wealth managers, but we believe it creates a great opportunity. A small number of wealth clients may prefer a fully automated experience; however, we believe the masses will favor a hybrid experience that offers the benefits of human experience and interaction as well as the advantages of the most innovative technology the market has to offer. The fully automated experience might appeal to digitally advanced millennials at first, but we believe they will gravitate towards the human touch of the hybrid model as life events, such as buying a home or saving for their children’s college education, become a reality. The hybrid model, rather than advancing an industry takeover by fintech startups, empowers traditional firms that can build comparable technology to, or partner up with, these fintech firms. This should enable the traditional firms to remain the major players in the future of wealth management. While some of these traditional wealth managers have already immersed themselves in the digital wealth growth, the overwhelming majority appear to be at a point where they realize the importance of digital innovation in their wealth management business but aren’t quite sure when and where to start. It will be interesting to see the different paths these firms take as they attempt to remain at the forefront of wealth management.

 

References:

[1] http://www.investmentnews.com/article/20151105/FREE/151109964/betterment-hits-3-billion-aum-blows-past-start-up-competition

[2] http://cnafinance.com/tradeking-review-2015-read-this-before-signing-up/1745

[3] http://fortune.com/2015/05/07/robinhood-stock-trading-funding/

[4] http://money.cnn.com/2015/04/15/technology/acorns-series-c/

[5] https://www.ubs.com/magazines/ubs-perspectives/en/issue-24/2015/ready-for-tomorrow-today.html

[6] http://www.investmentnews.com/article/20151015/FREE/151019953/schwab-intelligent-portfolios-up-37-in-third-quarter

 
 
 
 
 
 

About the Authors

kapin vora

As Partner for the North American Wealth Management practice at Capco, Kapin is responsible for the market offerings with a keen focus on the development of digital initiatives that will enhance the capabilities of today’s progressive Wealth Managers.

A recognized thought-leader and expert in the Wealth Management sector, Kapin has obtained over 15 years’ experience while delivering large-scale, transformation initiatives for a variety of institutions. Whether working with boutique Wealth Managers, leading Investment Banks or Asset Management firms, he has led the implementation of clearing transformations and the adoption of digital innovations. With a particular expertise in operational strategy and planning, Kapin has been instrumental in helping these organizations successfully review and address their technology and outsourcing requirements.

tobias henry

tobias henry

Toby is a Managing Principal in the Wealth Management practice of Capco, where his area of expertise lies within digital and mobile transformations to improve customer experience and boost profitability. From his induction to the Financial Services world at HSBC, Toby has amassed a varied project portfolio covering proposition development, online trading platform design and delivery, in addition to business analysis for the Cards (Debit and Credit) and Mortgage products. He also holds ISEB Certifications in Modelling Business processes, Requirements Engineering, IT enabled business change and Business analysis essentials.

 
 

The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.