FinTech Innovations in Wealth Management

FinTech Innovations and Business Model Transformation in Wealth Management

The global wealth management industry has seen exponential growth over a decade due to favorable market conditions. However, the industry now faces growth challenges due to rising inflation, the war, intensified geopolitical tensions, and emerging recessions along with heightened competition fueled by FinTech innovations. The only choice left for wealth management companies is to rethink and revamp their business models to withstand the competitive pressure. 

As the wealth management industry adopts new technologies and unlocks innovative services, it holds endless growth potential. As per the industry research report by Allied Market Research, the market size of global wealth management stood at $1.25 trillion in 2020. And, it is expected to grow at a CAGR (Compound Annual Growth Rate) of 10.7% to reach the projected value of $3.43 trillion by 2030. 

New customers (Millennials, Gen Z) with new traits, growth of high-net-worth individuals, accelerated digital engagement and new products, etc. are transforming the business models in the wealth management industry. 

Business Models in Wealth Management

Traditionally, the wealth management industry operated on only one business model- a human-led advisory model. The industry was only serving the client base of UHNW (ultra-high net worth), HNW (high net worth), and family offices. With the fintech innovations in the wealth management space, there is a shift in the client base. WealthTechs are now focusing on extending wealth services to the next generation, affluents, and women investors. 

With the adoption of technological advancements, the wealth management industry now has three main business models or service models. 

• Human Advisory Model

Human-led advisory model or in-person advisory model is amazing in terms of trust element and quality. However, the human-led advisory model is quite expensive and difficult to scale at large. Considering the current focus of the wealth management industry is on scalability and cost-efficiency, human-only models may need to evolve more rapidly to stay relevant with time. 

Human capital still plays a vital role in the wealth management industry. The combination of human capital and tech resources can evolve the model. Fintech innovations in the wealth management industry are already boosting the efficiency of wealth managers and empowering them to provide optimized services to their clients. With rising WealthTech startups, wealth managers can now easily access data, and get deep insights using cutting-edge technologies. 

Here are a few important studies that support this view:

• As per the survey by Refinitiv, 57% of the investors (survey respondents) prefer to have interaction (telephonic & in-person) with their advisor, and almost 49% of the investors prefer in-person interaction with their advisor. 

• As per Morgan Stanley’s Wealth Management Pulse Survey, May 2023, 72% of investors believe that artificial intelligence is a game changer and 74% of them believe that the technology can enable wealth managers/financial advisers to deliver better service. And, 82% of investors are of the view that human guidance can never be replaced by technology. 

• A global strategy consulting firm, Simon-Kucher’s latest wealth management study on high-income earners in US and Canada finds 63% of the investors (survey respondents) prefer to work with human financial advisors over robo-advisory.

• Digital Advisory/Robo Advisory Model

Robo-advisory is a completely automated, algorithm-based financial planning and wealth management model. Low-cost offerings and accessibility are the key features of this model that make it a highly scalable model. The introduction of this model has made WealthTech services affordable for young investors, mass affluents, and next-generation investors. 

Introduced in 2008 during the time of the financial crisis, robo-advisory models have evolved significantly over time. With the integration of advanced technologies like artificial intelligence, machine learning, big data analytics, etc. robo advisors are trying to address complex financial needs and provide more sophisticated services to their clients. Many leading wealth management companies like DBS and JP Morgan Chase have also included robo-advisory in their service offerings. 

The rising number of tech-savvy next-generation investors and the demand for low-cost financial advisory services are the key drivers for the expansion of the robo-advisory market. As per the industry report by Spherical Insights, the market value of global robo-advisory services is worth $4.1 billion in 2021. And, the global robo-advisory market is projected to grow at a compound annual growth rate (CAGR) of 29.7% to reach a value of $42.89 billion by 2030.

Here are the top WealthTech brands/key players in the robo-advisory market

Company Name	Founded Date	Business Location	Estimated Revenue
Betterment	2008	US	$151.1 Million
Acorns	2012	US	$180.4 Million
SoFi	2011	US	$1.1 Billion
M1	2015	US	$11.6 Million
Stash	2015	US	$105 Million

• Hybrid Advisory Model

Hybrid advisory model offers the best of both worlds by blending the technology powers with human touch. Many WealthTech companies are offering the hybrid advisory services by adding the human element to their digital advisory service offerings. This model is rapidly being adopted post-pandemic and it is an ongoing trend in the industry. 

As per the industry report by Grand View Research, hybrid advisory or hybrid robo advisory is the future trend in US market that has high scope for expansion.

In a hybrid model, the investor gets the benefit of personalized advice from human financial advisors. Technology can help in digital onboarding, self-service, better engagement, portfolio rebalancing, and more. With the requirement of fewer human financial advisors, the model is cost-effective and scalable.

As generational wealth transfer is afoot, it is important for every player in the wealth management industry to adopt a future-ready model that can provide exceptional price transparency, and a highly personalized solution and enhanced digital experience. Along with emerging WealthTech startups, big wealth management companies are also adopting the hybrid model. Here are a few examples:

• Additiv, a WealthTech provider offers a ‘hybrid wealth manager’ application. This is an engaging solution that provides personalized, human advisor-assisted, and self-service access applications that can enhance investor experience. 
• Blackrock had also launched tailored portfolio services for the clients by blending advanced technology with human inputs. 
• A well-known investment management company, Vanguard offers hybrid-advisory services known as ‘Vanguard Personal Advisor’ that combine the expertise of advisors and the power of sophisticated technology.

Emerging future business models in the WealthTech space

With the growing fintech innovations in the wealth management space, distinct business models are emerging and becoming more viable. Here are the three main emerging models:

• Integrated WealthTech Platform Provider

Integrated WealthTech platform providers offer advanced technology-driven solutions to wealth management companies and financial institutions to help them deliver optimized wealth management or financial advisory services to their client. Emergence of WealthTech as-a-service is helping the wealth management companies and independent financial advisors to leverage the technological advancements for managing their client’s wealth more effectively. 

This empowers wealth management firms to create innovative products/services, offer digital tools and distinctive models to meet changing customer needs quickly and democratize the wealth management space. 

• Domestic Wealth Manager

This model targets high-net-worth and ultra-high net-worth clients who need high-quality, personalized services. It is quite similar to the hybrid advisory model. Domestic wealth manager uses a mix of digital tools and personal interactions to cater to client needs offering them holistic wealth management solutions such as financial planning, customized portfolio, taxation advice, estate planning and more.

• Global Investment Expert

This model targets the most advanced level of wealth management space. In this, well-known wealth management companies intertwine advanced technologies with the expertise of wealth managers to cater to their exclusive wealth management client base worldwide. This requires a deeper understanding of the international financial markets, diverse asset classes and more. 

Conclusion

Newer business models continue to evolve in the wealth management space with technological advancements, shift in focus from HNIs and ultra HNIs to mass affluents and the changing client expectations. New-age models also face specific challenges such as transparent pricing, investments in technology, increased regulatory scrutiny, large-scale execution ability and shift in investor’s behavior. A report published by Citi Business Advisory Services – ‘Disruption and Transformation in Wealth – Future Proofing Service and Operating Models’ has surveyed various people across wealth management, retail wealth, and private banking. The report highlights and discusses the challenges faced by the wealth management industry and their focus on the transformation of business models. 67% of the respondents have specified digital client experience as their top focus area while developing next-gen business operating strategies to build a strong wealth management ecosystem.