How Would You Manage $210 Trillion?

By Henry Bee (Cassia Research), Le Zhang (Instrument Capital), and Brad Lawler (Draft App) Published on April 24, 2018

FinTech. A word that’s immediately associated with payment, lending, and blockchain these days. However, with a projection of around $210 trillion in private wealth globally by 2019 – and $55 trillion in North America – wealth management is the gorilla in the room.

wealth management startup technology

Banks are starting to understand this and are working to improve online and mobile offerings. These banks are looking to serve those with $20 million or less with standardized, consistent advice through digital platforms, while clients with $20 million or more, banks will be wise to strategically use digital tools, like portfolio access, to free up relationship managers to work more proactively with clients.

Wealth management will never be the same.

Over the past 5 years, financial advisors and wealth managers are making less money than we've seen in a lifetime. Fee compression and a change from commissions to fees mean that banks and wealth management firms need more clients to make up for the thinner margins. These firms are increasingly looking to adopt technology to make their reps more “scalable”, or risk becoming obsolete.

During the same period of time, hyper-personalization has become a game-changing force in industries like video streaming (Netflix), e-commerce (Amazon), and music (Spotify). Could wealth management be the next frontier in personalization and to a greater extent, a WealthTech revolution?

FinTech startups like Mint, Robinhood, and Personal Capital have shown consumers that they no longer have to settle for antiquated and frustrating financial technology.

Up until now, financial institutions paid little attention to these startups and relied on brand loyalty and clout over agility, innovation, and user-centric design. The tide is turning. Banks and wealth management firms are starting to learn from (and work with) innovative young companies.

robinhood app user experience

FOMO in WealthTech bubbling?

Financial institutions have seen these trends, and are moving quickly. Goldman Sachs acquired Honest Dollar, a Texas-based startup focused on affordable 401(k) alternatives. Blackrock acquired FutureAdvisor, a digital-advice platform to enhance customer relationships and grow their books of business. In addition, almost every large financial institution in the U.S. today has an innovation team that is actively looking at ways to modernize their firm’s customer experience. A prime example is UBS’s partnership with SigFig, a San-Francisco-based consumer driven WealthTech portal company, to develop financial technology for UBS’ financial advisors and their clients.

The FOMO is strong in WealthTech right now.

Banks may not even have a clear path or plan, but are rushing in to partner with startups. They have identified innovation as the key to the future of financial services, and have started to evaluate and work with firms that may not have existed a few years ago. They benefit from startups owing to their expertise, and the latter benefit from access to funding and a huge audience.

These financial institutions use Plug and Play as a portal to these talented startups. A prime success story is that of Lending Club, whose portfolio of nearly $1 billion worth of loans were acquired by J.P. Morgan.

Austin-based investment analytics company, Draft, realized this opportunity early on and is now helping large financial institutions deliver an enhanced and more personalized experience for their investment customers. “As a firm that creates insights from large sets of previously unused data,” Draft Founder and CEO, Brad Lawler, says, “we’ve seen most interest coming from financial institutions that have access to a massive audience. However, we’re starting to see more and more interest from independent wealth advisors looking to create an improved digital experience for their clients.”

Instrument Capital is a company focused on the concept of “investor-side optimization” that promises to change the methods used in personalized portfolio construction, risk tolerance assessment, and fund curation to better match investment products with consumer needs. “Many firms claim they personalize recommendations and allocations,” Co-founder and CEO Le Zhang says, “but really when you look at the questionnaires, besides age and risk tolerance, the portfolio advice is very cookie cutter.” Two people may seem highly similar in age, income, and risk tolerance but may work in different industries, and own a home in different cities, and could benefit from a more personalized investment mix.

Startups like Cassia Research believe that technology will blur the line between the portfolio manager and the advisor. For independent advisors, RIAs, and wealth management firms, Cassia has built COPILOT, a SaaS solution to save them time, win more clients, and construct risk-targeted portfolios using tools from the biggest hedge funds. Cassia uses AI and big data to continuously improve its engine and offer it through a highly user-centric interface. “We’re all about getting quants and designers to talk to each other,” says Henry Bee, CEO at Cassia.

Is Silicon Valley embracing collaboration instead of disruption?

Large financial institutions already have well-established distribution channels, large audiences, and brand power. They just need new technologies to help their wealth advisors win more clients and manage them better. The picture is very different in WealthTech, where collaboration, not disruption, is key to driving change. Innovation platforms like Plug and Play serves as a powerful catalyst for change by connecting startups with big banks across the country.

Unlike wealth advisors at large institutions, independent advisors at small RIAs lack the technological resources or audience of larger firms. To meet changing client behavior and investors’ expectations, advisors are hungry for tools to deliver better portfolios and experience for their clients, so they can scale themselves. These technologies will also help them foster relationships with the millennials and future-proof their businesses.

Over the next decade, the way we give and receive financial advice is going to change drastically. Financial advisors will be empowered with technology tools that allow them to give advice that used to only be available to the ultra-wealthy.

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