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What is Fintech's impact on the traditional Wealth Management space, and who we see at Sia Partners, as the leading disruptors to traditional Wealth Management?
For much of the industry’s history, Wealth Management has been perceived as a vehicle for the “rich” to increase their wealth. Wealth Management has long been defined as “an investment advisory service that combines other financial services to address the needs of affluent clients.” Leading firms in the industry for 2022 include the likes of UBS Global, Credit Suisse, Bank of America (Merrill Lynch), and J.P Morgan (Figure 1).
While these firms have served the wealthiest individuals, the increase in availability and access to wealth management services has prompted an evolution of the industry from its traditional roots. FinTech companies have broken through industry barriers to provide clients with services that are unparalleled to the traditional wealth management space.
FinTech, otherwise defined as the application of technology in the financial sector, is one of the fastest growing industries in the history of financial services. The industry is predicted to reach a market value of approximately $332.5 billion by 2028 and CAGR forecasts ranging between 19.8% to 25.18% over the period from 2022 to 2027 (Figure 2).
In 2022 as the economy turned, 81% of consumers were more focused on finance. 76% were using technology to manage their finances, and almost half believed it helped them feel in control of their finances in 2022 (according to Plaid's 2022 Consumer Survey: The Fintech Effect).
In spite of the historically independent, startup nature and limited scope of FinTech, recent years have displayed an increasing number of major financial institutions acquiring, partnering and investing in FinTech companies with hopes of catching up on their technological backlog. One Forbes article showed that the average investment in FinTech amongst financial institutions has grown from $2.3 million in 2019 to nearly $10 million in 2021, which displays the scale, severity and time-sensitive nature of the disruptions caused in the industry. Examining the influence of these disruptions is key to understanding the present state and future trajectory of the Wealth Management industry.
The speed and magnitude of FinTech’s impact on the traditional wealth management space will be dependent on the industry’s ability to adapt to the changing market landscape. The current market has shown that clients increasingly demand for ease of access, enhanced user experience, transparency, lower fees, and personalized, dedicated portfolios. FinTech firms have recognized this and developed three capabilities to streamline the delivery of financial services. Those services include:
These three products cater to the wants and needs of today’s clientele in ways that traditional wealth management is either struggling with or unwilling to emulate. Regardless, these technologies combined with the demographic shift of wealth are key factors contributing to the transformation of a once white-glove, bespoke service. Shifting customer expectations have led the industry to experience rapid digitalization, the democratization of investments, and the rise of the everyday investor.
While the wealth management sector has long advertised itself as a personal, relationship-based business, this unique selling point is holding less and less weight among modern investors. A 2026 Market Size report showed that between the years 2022-2026 market size of global online trading market will rise from $10.21 billion to 13.3billion USD (Figure 3)
Engaging with clients via a digital platform offers many benefits, which can be exemplified by the increase and visibility of electronic brokers such as Robinhood, which have stated goals to democratize financial services and provide access to non-traditional investment opportunities without costly fees. The app’s frenzy-like popularity is just one example of the shift in demand towards a quick and effective digital interface.
When we observe today’s market, it is quite evident that the technical expertise of a single human advisor no longer justifies the high price tag. The average fee at a full-service brokerage is $150 per transaction, whereas for most online brokers a fee is non-existen.t While such firms tout a premium price for research, education, and advice, the market has shown that today’s re-wired investor wants to stay in control, do things themselves, while leveraging multiple sources of advice rather than just one. The zero transaction fees, zero minimums, sophisticated cloud-based algorithmic trading, and easy-to-use interface is more appealing to the growing clientele. In the coming decade, the demographic shifts of an aging advisor population and the mass transfer of wealth from baby-boomers to younger generations will require major operational changes in order for incumbent firms to stay relevant. Today’s clientele likes to dedicate their resources towards receiving financial advice from more than one source, including from a “robot”, or computer algorithm.
Robo-advisors operate with little reliance on human interaction between client and advisor. They deliver sophisticated financial advice by using Artificial Intelligence and Machine Learning to understand and predict investor preferences based on psychographic and demographic questions. The total valuation of robo-advisors was approximately $4.51 billion in 2019 and expected to grow more than 9 times that amount by 2027, demonstrating the increased willingness and trust clients have towards utilizing innovative advisory models.
Robo-advising companies such as Betterment have entered the market with low fees and the ability for clients to choose different investment portfolios to reach their individual goals. These Fintech companies allow users to choose from multiple portfolio strategies that align with their individual interests, including Innovative Technology, Social, and Climate Impact portfolios. In addition, companies such as Betterment provides tax management services and emergency fund portfolios for their clients upon request. The everyday investor is enabled to invest their money strategically, without the need of a minimum balance like traditional wealth management firms. The host of services broadens the target market and increase their user base. These tailored, yet democratized investments are effective because they offer personalized services that today’s clients expect, but on a much larger scale. This results in a highly profitable business model that provides for more operational efficiencies than the traditional Wealth Management model.
At present, only 17% of Americans claim to use a financial advisor, according to a CNBC and Acorns' Invest In Your Savings Survey. In this same survey, 75%, across all age groups of Americans admit to managing their finances entirely on their own (See Figure 4).
As the stakes get higher amidst increases in debt and living expenses, setting, reaching, and managing financial goals has never been more important. FinTech companies such as Mint have been vigilant in reacting to the change in times and adapting accordingly. These mobile money management companies allow clients to automate their budgeting process and monitor their financial health through linking all financial accounts in one digital space. Much like Robo-advising companies, mobile money management firms leverage machine-learning technology, noticing trends in users spending habits from previous months data to actively advise the user on money management methods. Additional features include viewing and tracking your investments, allowing users to compare their portfolio to the market and adjust accordingly. This zero-cost financial service has risen to the top of the market on account of its simple, exceptional user interface and smart tools. Offering a free alternative increases the accessibility of personal money management, while also granting customers ease of use and 24/7 access. These mobile methods are favored for their convenience, sophistication, personalization, and automation that traditional Wealth Management does not offer.
In general, “WealthTech” is a term often used to describe the subset of the broader FinTech industry that directly aims to provide digital solutions that enhance wealth management and investing. Below is a glimpse at a few of the leading WealthTech firms that Sia Partners sees as key contributors to the major disruption and evolution of the Wealth Management industry. These firms were deemed influential based on a number of criteria, such as capital raised, revenue, and customer traction, along with potential cost saving solutions and efficiency improvements offered. Sia Partners sees these firms as important considerations for any Wealth Management firm who looks to develop their digital transformation strategy, due to the FinTech business models carrying market potential, being the most likely to succeed and have a lasting impact on the industry.
Many firms are even more influential due to their combined service offerings that appeal to wider market segments, such as Robinhood and eToro which offer both cryptocurrency trading and equity trading. Other firms, such as Fidelity, are electronic brokers that also offer robo-advising capabilities.
Firms not included in the figure but worth mentioning include iCapital, Stash, and Public.com, three younger WealthTech startups that have each garnered $1 billion+ valuations and have raised at least $300 million from large legacy financial institutions that are looking to integrate their technologies into their own business model.
To maintain a competitive advantage in the long-term, traditional players in the wealth management space will need to adapt to the evolving technological landscape while continuing to deliver the human touch that FinTech firms have not been able to emulate. With many of tomorrow’s investors beginning their financial journey on digital platforms, success in the long-term means closing the gap between low-tech infrastructure firms and the needs of their tech-savvy client base.
Major institutions are adapting to this innovation mindset through either organic or inorganic growth. Morgan Stanley, for example, sought to develop its technological capabilities through the acquisition of E-Trade, an online brokerage and digital bank, for $13 billion in 2020. Their efforts to complement existing client-advisor relationships with the integration of online services aims to cater to a wider range of investors. Hybrid services provide for the highest returns, as it combines the expectation for affordable, easy-to-use online platforms with “the longstanding desire for human advice”. Here are some of the other recent transactions that traditional wealth management firms have made to bridge that gap:
Other large firms such as Charles Schwab, Fidelity, Merrill Edge, and TD Ameritrade have been following suit to maintain their power and influence in the evolving financial landscape. According to a 2022 PwC report, seven of the top fifteen firms in the industry have announced significant M&A deals in the last three years, with firms like UBS acquiring the robo-advising startup, Wealthfront.
50% of wealth managers do feel that anywhere from 1-40% of their business is at risk. This has pushed firms to increase their investments in technological expansion to both cut long-run costs and provide more value to their customers. Traditional institutions including UBS, Goldman Sachs, Morgan Stanley, and others are increasing spending on internal automation projects and external software tools, with industry-wide spending expected to reach $24 billion annually by 2023. Increased investment spending on automation internally and through M&A have strengthened major firms’ wealth management offerings and simultaneously slowed the private robo-advisor disruption.
Not all firms are catching on, however, with 17% of incumbents underestimating the disruptive potential of new entrants, believing they pose no risk to their business. There also remains the risk of cybersecurity breaches and heightened regulatory scrutiny which sharpen barriers to entry in the digital space. Integrating legacy technology with the sophisticated tech of digital platforms is another friction point that has proven difficult and costly to overcome. In effect, a firm’s failure to realize the value of omnichannel capabilities is the perfect formula for obsolescence. This poses a question to wealth management firms of whether the cost to innovate and integrate new FinTech services and products outweigh the costs of doing business as usual.
Sia Partners is a next generation consulting firm focused on delivering superior value and tangible results to its clients as they navigate the digital revolution. We partner with Broker/Dealers, Corporate and Investment Banks, Asset Managers, Clearing Houses, Depositories, Custodians, and Alternative Investors. Our team works to assist financial institutions, adapt to the changing demands of the industry while controlling costs with strategy, process reengineering, integration, and implementation.