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WealthTech - Robo-Advisors & digital brokerages
- 1. LET'S TALK WEALTH, SHALL WE? AUTHORED BY Kannagi Mishra
- 2. If you think FinTech has disrupted the financial services industry, wait until you learn what its very own vertical WealthTech has to offer But first, let’s begin with an introduction WealthTech as the name suggests, is the digitalization of services provided within the Wealth Asset management industry impacting the complete value chain, WeathTech companies offer digital solutions on the following - Digital Services Service s Personal Finance Portfolio Management & Rebalancing Digital Brokerage Risk & Compliance Wealth & Asset Management One of the most dominating disruptors of the industry is the Robo Advisor, reshaping the services of Portfolio Management and Personal Finance. To break this down into simpler terms, Robot-Advisor is a technology platform for algorithms- driven financial planning services with almost no human intervention. According to CNBC, Robo-advisors have grown into an industry that managed US$460 billion in 2020, a 30% increase from 2019. Some analysts predict Robo-advising will become a $1.2 trillion industry by 2024 Robo-Advisor PAGE | 02 WEALTHTECH
- 3. There are three business models - B2C (Business To Customer) Stand alone WealthTech companies providing Robo Advisor services to the end customer for managing their wealth Such companies are either fully automated services or hybrid services having human advisors additionally. E g Betterment in the US, Nutmeg in the UK B2B (Business To Business) A Robo for the Advisors. This model is the amalgamation of services or in house capability within the bank Vanguard Personal Advisor Services, for instance, is one of the major players in this area by Assets Under Management amounting to USD 231 Bn B2B2C (Business To Business To Consumer) This model involves a partnership between a financial institution and a Robo advisor. Eg Barclay’s partnership with German firm Scalable Capital (in July 2020 J P Morgan’s partnership with Nutmeg (in Nov 2020). Business Models PAGE | 03 WEALTHTECH
- 4. Advantages Robo-Advisors open opportunities for mass affluent inventors to leverage cost-efficient and readily accessible financial planning. While professional financial planners typically charge 1% to 2% of the total AUM of a client, most Robo-advisors charge a flat fee of 0.2% to 0.5%. It needs no explanation that with such cost efficiency Micro-investing is gaining immense popularity among the tech-native generations. Robo-Advisors can help manage the growing need to rebalancing frequently to maintain the proportions of the securities in a client’s portfolio. Auto-rebalancing caters to the especially high need of HNI & UHNI investors. The algorithm can suggest ways to make tax-optimized decisions. Clients can also invest based on their inclination such as ESG focused or Thematic investment options. Cost Efficiency Auto-rebalancing Tax Optimization & Thematic Investments Limitations Diversification of portfolio is largely limited to ETFs, Mutual Funds. There is a lack of personalization. Has not been extensively tested under extreme volatility and uncertainties such as Covid-19 or a recession Limited Diversification Volatile Scenarios PAGE | 04 WEALTHTECH
- 5. Betterment A Hybrid advisor with US$26.7 billion in AUM across 615,000 clients*. Wealthfront Fully digital advisory with US$25 billion in AUM across 440,000 clients*. *As of May 2021 Nutmeg First and the largest fully digital wealth manager in the UK with over 140k customers and it’s regulated by FCA Scalable Capital This German unicorn has partnered with Barclays to offer B2B service in UK through the collaboration. Bambu B2B wealth management digital firm, HSBC partnered with Bambu for its robo-advisory services in Singapore Kristal.AI A hybrid B2C WealthTech that leverages advanced algorithms and human strategies to assist users to invest in a variety of financial products. India Kuvera Fund based Robo-services with Aum of US$1.97bn. As per Fintechnews Singapore, AUM in Robo- Advisor segment has grown to US$8.8bn in 2020 B2C start-up business model targets investors with small AUM, which eventually may not be a profitable business model. Partnering with bigger financial institutions or expanding AUM by other strategies will pave the way for scalable & profitable business. A fully automated solution will not offer as much flexibility as a professional advisor. Traditional investment advisors will always remain on the forefront; however, a hybrid business model will be the most desirable business model in future. According to a report from CNBC, some analysts predict Robo-advising will become a $1.2 trillion industry by 2024. Leading Stand-alone WealthTech players across the globe USA UK Singapore Singapore Additiv Additiv is a wealthtech company that is renowned for its digital wealth management innovations PAGE | 05 WEALTHTECH
- 6. Digital Brokerage Another emerging segment within WealthTech is the Digital Brokerage Online platforms and software that enables consumers to access the stock market and investment vehicles. Advantages Discounted Brokerage - Unlike the traditional platforms that charge a higher flat fee per trade, digital platforms offer discounted brokerage across all asset classes Easy access to various Digital Asset Classes - Cryptocurrency, Initial Coin Offering, Digital Tokens Social Trading - Allows naïve or inexperienced investors to shadow an experienced trader Quick and easy Client Onboarding They offer Open Market Trading Education to New Investors Conclusion As the shift of wealth paves its way from baby bloomers to Gen X, millennials Gen Z, the need for digital solutions in the Wealth Asset Management industry is growing fast. Not only new age investors but Wealth managers are also increasingly looking towards technology to enhance existing solutions or create new solutions altogether CoinSwitch Kuber An app based cryptocurrency digital exchange platform exclusive to Indian retail investors. QUOINE First global cryptocurrency exchange officially licensed by the Japan Financial Service Authority It currently processes annual transactions worth over USD 50 Bn. eToro Israel based social trading and multi asset brokerage company that focuses on providing financial and copy trading services. PAGE | 06 WEALTHTECH