The FinTech sector, now estimated to be worth $4.7 trillion, is poised to profoundly disrupt traditional business models in industries from wealth management to banking, to foreign exchange and payments and its rapid growth is posing imminent challenges, as well as opportunities, for many existing players.
Over the last three years, the threat to existing offline financial advisory services has been from ‘robo-advisors’, usually defined as low cost computerized asset-allocation applications, and their services include largely automated online portfolio management and direct online insurance.
FinTech disruptors claim a number of important benefits over incumbents. One is price: robo-advisors such as Wealthfront and Betterment offer financial advice based on algorithms. This means that fully automated providers charge as little as 0.25 per cent; services with a touch of human involvement charge around 1 per cent.
Being less burdened by regulation, legacy IT systems and costly branch networks allows them to undercut conventional competitors. TransferWise, for example, is far cheaper than the fees that banks levy to send money across borders.
The rise of the robo-advisors
‘Robo-advisors’ can also tap into a broader market than traditional wealth managers, because they offer much lower minimum investment limits. Moreover, whereas humans often have biases and preconceptions, FinTech algorithms are completely neutral when it comes to lending and assessing risk for small businesses and individuals.
All this looks set to improve the quality of financial services by increasing competition in the industry and creating a more diverse and stable credit landscape.
Though ‘robo-advisors’ are a fast growing sector, their combined assets of $20 billion are currently dwarfed by the assets of traditional managers, which stand at $17 trillion. Yet we are in the midst of a clear generational shift. At Wealthfront, 60 per cent of clients are under 35.
Low and transparent fees appeal in particular to risk averse young clients looking to grow their retirement pots, while the ongoing trend in mobile communication technology has spurred consumer to seek out more automated digital advice. More broadly, the growing perception is that innovation in financial services will be driven by nimble tech firms rather than more cumbersome incumbents.
For traditional wealth managers, however, robo-advisors need not be something to fear. Technology should be seen as an enabler to enhance current client relationships and to give advisors new opportunities to begin conversations with potential clients.
An example is in areas such as inheritance planning, specifically aimed at older clients. BizEquity’s new service, ‘Advisor Office’, aims to provide wealth managers with tools that include business valuations and company performance analysis, helping wealth managers to gauge the risk profile of clients and showing whether they are underinsured or underfinanced, using the most up-to-date figures.
It is thus a powerful tool for staving off the new challenges posed by robo-advisors, and has already been signed up to by over 80 financial institutions around the world.
A threat or an opportunity?
In fact, the robo-advisor threat could be turned into an opportunity for wealth managers that embrace the new technologies. There are a wealth of areas in which financial services firms could benefit from investing in smaller players and getting insight into their solutions. The recent acquisition of eMoney Advisor by Fidelity Investments is one such example.
London appears uniquely positioned to take advantage, buoyed by government tax schemes to support innovation within the City of London and TechCity. It accounts for more than half the fintech funding in Europe.
Last year, Barclays launched its own fintech incubator and Santander created a fund to invest in fin-tech companies. In order to keep up, wealth managers need to proactively increase their focus on innovation and utilise cloud based big data technologies.
The rise of FinTech is ultimately a positive development. It is helping to cut costs, improve quality and increase the democratisation of financial services for the 99% not just the 1%.
Man and machine in tendem
But it is only one part of the overall picture. Algorithmic guidance is a complement to, not a replacement for, bespoke human advice the traditional advisors can offer. FinTech can offer an opportunity for traditional players to enhance their services and remain competitive in a fast transforming environment through enhanced prospecting and customer care.
We have the unique perspective to have our head office internationally, be based in London, the FinTech capital of the world, but also have our U.S. Headquarters located 5 minutes down the road from Vanguard, the world’s first robo-advisor.
Vanguard which manages over $3 trillion and was founded by legendary entrepreneur Jack Bogle nearly 40 years ago, manages assets for many of these next generation “robo-advisors,” which act as storefronts for portfolio management. Since it’s founding their portfolio management fees have been one of the lowest or the lowest in the industry.
In a sense like much in technology, what is old is new again. Wealth Managers; Banks; and insurance companies need to leverage Big Data and cloud based technology and build differentiated systems that engage prospects and make their customers feel unique.
It is truly a remarkable time to be in the FinTech industry as we have the chance to help the most well funded businesses on the planet with the largest IT budgets leverage change.