Fintech is disrupting many traditional industries by using modern technology and digitalizing services that were until recently very rigid, in-person, unapproachable for many people, and mostly expensive.
I recently wrote about how insurtech has disrupted the insurance industry and how fintech is changing the real estate industry.
In this article, we’re having a look at how fintech is transforming the wealth management industry.
How Big Is the Wealth Management and Financial Advisor Industry?
According to some estimates, the whole wealth management industry has $103 trillion of assets under management globally as of 2020.
The assets will only continue to grow, and so is the industry directly involved – the wealth management and financial advisor industry.
More than 50% of assets under management (AUM) belong to institutional investors (banks, hedge funds, mutual funds, endowments…). Everything else belongs to individuals and smaller organizations.
The goal of wealth management is to invest and grow assets while minimizing the risks involved and preserving wealth, often for future generations.
7 Ways Fintech is Transforming Wealth Management
Robo-Advisors
Despite the tacky name, robo-advisors brought tectonic changes to the wealth management industry. Their low barrier of entry enabled millions of people to start investing practically overnight.
They are focused on ordinary investors like you and me and offer an automated service that costs far less than human financial advisors.
While algorithms manage your investments, in most cases, it’s people that design the portfolios. All the automated services and advice that are shared with customers are shaped by experts in the fields of quantitative research, trading, tax, CFP, behavioral science, etc.
Everything you see in your robo-advisor dashboard wasn’t plucked from thin air. It’s a result of research, experiments, and implementation.
Every single day, automated processes monitor and operate your portfolio by rebalancing it if it drifts too far away from your target assignment and executing tax strategies you enabled.
The technology behind robo-advisors helps accurately and consistently enforce your investment strategy.
Computers are simply better than people at doing certain things. For instance, monitoring every price change in the market and performing billions of calculations at the spur of the moment.
The most well-known robo-advisors in the US are:
- Betterment
- Acorns
- Wealthfront
- SoFi
- Personal Capital
- Ellevest
- M1
- Charles Schwab
Robo-advisors like Betterment let you plan your investment and track your goals from one simple dashboard.
You can choose to do automated investing, IRAs and 401(k), choose from a range of portfolios such as a socially responsible one or bonds only, or invest in crypto portfolios, for instance.
There’s no shortage of options for even the beginner investor. You can invest how much you want when you want.
If you’re a more serious investor, you can still get access to a human advisor. In that case, you’ll have to pay for a premium plan.
The global robo-advisor market is, by some estimates, going to reach a valuation of $41 billion by 2027. That’s ten times more than what the market was worth in 2019.
Lower Cost
Fintech startups that offer robo-advisors have far less overhead than traditional wealth management companies that have droves of financial advisors that all need a computer, a desk, chair, office space, water-coolers to gather around, wages, and much, much more.
Robo-advisor companies, on the other hand, don’t require almost any of that, and if they do, it’s for far fewer employees than traditional companies.
Because of that, it makes sense that robo-advisors can offer a free service or one that doesn’t cost much.
A robo-advisor service typically takes a small percentage (less than 1% per year) or charges a small dollar amount per month. For Acorns, a well-known and popular robo-advisor, the fee is $3 per month or $5/m for a family account.
Generally, for smaller investments, it’s better to get a platform that charges in percentages, and for larger portfolios, it’s better to get a fixed-price advisor.
Productivity
Many robo-advisors’ algorithms, like the one from Betterment, rely on Nobel Prize-winning investment theory to drive their models.
Best investment practices strive to create an investment portfolio that has the greatest return and the smallest risk.
At least some of the robo-advisors out there use state-of-the-art investment portfolio research advised by modern theories to successfully manage clients’ assets.
Not relying on human employees makes robo-advisors incredibly productive and easy to serve millions of people at once. The good thing for clients is that they don’t have to do much as well.
Choose your portfolio and strategy, and invest some money. That’s it. No need to schedule an appointment to talk to a financial advisor. If you aren’t sure what’s what, educate yourself by reading FAQs or see what works for other people in a similar position.
Micro-Investing
Most fintech investing platforms don’t have a minimum balance that you need to start investing. You can get started by putting your spare change to work or investing as little as $5-$10. As you have more money to invest, simply invest more.
Although investing a couple of dollars here and there certainly won’t get you rich, it could be a good motivation or a learning experience seeing the money grow out of nothing.
Robo-advisors aren’t the only platforms utilizing micro-investing. In fact, there are dozens of apps out there that allow you to invest your spare change automatically when spending money.
Digital banks like Revolut do this seamlessly, and money management apps like Cash App let you invest your round-up change in your choice of stocks, ETFs, or bitcoin with every purchase.
Self-Investing
There are many excellent tools and platforms that help investors invest their money themselves.
With basic knowledge, anyone can use these programs and platforms independently or collectively, making it easy for individuals to invest their money as they see fit.
Robinhood is one of the most widely-known wealth management and investing apps on the market.
The company popularized investing, especially among young people, and became notorious for disrupting the stock market and giving retail investors and institutions a headache.
To open a self-investing account, all you need is a valid address, social security or tax number, and to be older than 18. Robinhood is far from being the only app of this kind. There are now dozens of similar apps worldwide, each with its own strengths and weaknesses.
Interestingly, many digital banks also offer self-investing that includes stocks, ETFs, crypto, and even commodities.
Digital Experience
Finding the right financial advisor can be a lengthy and cumbersome process. It includes browsing for days to find a person or a company. Then you need to do an introductory consult to see if they’re right for you. If not, it’s back to square one, etc.
Fintech really smashed it out of the stadium by developing apps for wealth management that may or, more often, may not include human advisors.
Opening an account takes less than 5 minutes, and you’re ready to invest after you orientate a bit inside the app. It’s as easy as that.
Additionally, wealth management apps include heaps of educational content and news to keep you better informed.
READ NEXT: 4 Ways Fintech Change Real Estate (With Examples)
Easy to Use
As I already mentioned above, fintech solutions for wealth management are incredibly easy to use. You can do it all online or on a smartphone through an app.
Getting a hang of it all takes, at worst, a couple of days, and then it’s smooth sailing. There’s really no age group after 18 that can’t utilize a wealth management app.
Notable Fintech Wealth Management Examples
SoFi
SoFi is an all-in-one money management app. It does banking, credit cards, investing, insurance, mortgages and other loans, refinancing, and more.
SoFi makes financial planning accessible to all its members for free. You can schedule an appointment with a financial planner on the SoFi website or start investing, saving, etc., on your own.
SoFi’s financial planners help you create a budget, save for retirement, and tell you how to invest your money. You can also get help with insurance, borrowing money, and reaching any other financial goals.
Wealth management at SoFi starts with you opening a brokerage account with SoFi Invest. After that, you can buy and sell stocks or fractional shares, ETFs, IPO shares, and, of course, the ever-popular cryptocurrencies.
SoFi makes all of this super easy and secure, and you can build your portfolio from your couch via an app or desktop.
Betterment
Betterment is a fintech company offering a robo-advisor, plus a checking account with a debit card that includes cash back rewards when you spend your money.
Betterment is a great way to start your investing journey as it has a free account and is easy to use out-of-the-box. The app is one of the best on the market, and the company is really leaving its mark in the industry since it was founded around 15 years ago.
This well-known wealth management fintech startup has more than 700,000 users and more than $33 billion in assets under management.
M1
M1 is a popular investing and spending app that was founded in 2015 and has more than 500,000 users and around $6 billion under management.
With M1, you can get a free digital checking account and a Visa credit card that earns you up to 10% cash back. You can also borrow money with a flexible line of credit.
But, most importantly, you can build your wealth long-term by customizing your portfolio with stocks or funds, or investing in an expert-chosen portfolio. You can automate everything, including contributions and investments.
All in all, M1 is a great investing app and digital bank that will suit most people looking to invest their money long-term on an easy-to-use platform.
Conclusion
People used to pay a lot of money for financial advisors, therefore, only wealthy people were investing and only they had a professional wealth manager or advisor.
Fintech is turning the tables by making wealth management available to the masses by incorporating easy-to-use robo-advisors to do all the heavy lifting.
This strategy also has serious consequences on the cost, productivity, user experience, competition, and much more.
Additionally, AI has had a dramatic influence on wealth management. Both fintech and traditional companies have been utilizing AI to do most of the heavy-lifting and removing prep-work and menial tasks.
AI also helps deliver enhanced customer experience, investment decisions, and risk management.
Same as traditional banks did when digital banks started appearing, wealth management firms will have to seriously step up their game to keep up and not lose millions of customers to the new players.
