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Wealthtech to The Rescue Amid Doom and Gloom For Wealth Managers

Wealth management firms face a conundrum of headwinds like never before. From an environment with low or slowing economic growth, high volatility, high financial leverage by individual investors and pressure to de-lever personal balance sheets, high inflation rates and growing interest rates to a competitive market pressuring margins towards those of low-cost alternatives (ETFs and robo-advisors) and growing costs due to cyber risk and compliance with an ever-growing set of regulations.

In parallel, the Covid-19 pandemic has accelerated the pace of habit change for wealth managers clients.

Wealth management firms are turning to wealthtech to help save them, says Sam Levy, a seasoned investment banker with two decades of investment banking advisory and technology operations experience.

Levy has advised on more than 40 successfully completed buy-side, sell-side, and capital raise transactions representing management, founder-owned or private equity-backed companies, larger corporations, and private equity firms on over $3billion in aggregate transaction value.

Prior to joining Drake Star in 2022 as a partner, Levy worked for three years as managing director at Equiteq where he helped build the technology and tech-enabled services M&A practice.

Here Levy discusses how wealthtech is coming to the rescue.

Sam LevyWealth management firms face risks and their costs have risen dramatically since the financial crisis from many angles (operational, reputational, compliance, ESG, regulation, credit and reputational) and impact most aspects of their business, including: client onboarding, trading practices, portfolio management, supervision, compliance and reporting, information management and their middle- and back-office to name a few.

Competition has increased

With more than 100 robo-advisors globally charging less than half the fees of a traditional wealth manager and offering a growing set of sophisticated products and options to their clients, analysts estimate that robo-advisors’ assets under management (AuM) will grow to $16.0trillion by 2025, more than four times their estimated AuM in 2020 and more than three times the size of the assets managed by BlackRock, the world’s largest asset management firm.

Revenue is fleeing

The wealth management industry is on the verge of the most significant intergenerational wealth transfer in history. The exact amount and timing vary depending on the source and the consideration from $10trillion to close to $70trillion in the next 10 to 30 years. In addition, in 2021, EY found that 28 per cent of wealth management clients expected to move wealth relationships over the next three years.

The largest beneficiary is expected to be fintech firms (robo-advisors, neobanks) with a 74 per cent increase in expected change in use of providers between 2021 and 2024 at the expense of fund managers, brokerage firms and retail banks. This asset transfer represents a great risk but also opportunity for wealth managers to retain and capture users with a different or evolving relationship to their wealth.

Habits are changing

Accelerated by the Covid-19 pandemic, users are increasingly looking to leverage virtual tools provided by their wealth manager (51 per cent globally and across generations). While LatAm and APAC users lead the change, younger generations (Millennials at 78 per cent and Gen X at 56 per cent looking for more virtual tools) seek more digital interactions, as expected. However, overall, clients prefer a hybrid version of wealth manager with both an advisor and digital tools.

Clients want alternatives

Alternative assets are expected to make up to 24 per cent of the global investable market by 2025, according to the Chartered Alternative Investment Analyst Association, up from 12 per cent in 2018. Wealth clients, and specifically the mass-affluents also want a share of it. Wealth management firms need to offer a seamless experience that allow them to diversify their portfolio accordingly through them or their platform.

Digital innovation is evolving

As a response, the wealthtech industry’s innovation has shifted from connecting with investors, their peers and their accounts (Mint, SigFig, Wikinvest) to providing advisory services (Betterment, LearnVest, Personal Capital) to investing (Prosper, LendingClub, Motif). Several core processes will further be impacted by advances in artificial intelligence and machine learning technologies, including: client acquisition, advice and retention, sales, supervision and business performance management.

Behavioural analytics will support behavioural finance and traditional players will leverage embedded finance to tap into mass-affluent by providing more financial planning services typically reserved to the wealthier and existing clients will be able to diversify their cash reserves with more investment products.

Financial services firms are reacting

Digital banks form partnerships and acquire firms to provide embedded wealth management services to their customers. Aion Bank acquired ETFmatic, the London-based robo-adviser to integrate its API into Aion’s banking app. JPMorgan acquired Nutmeg to strengthen its retail wealth management offering and Singtel entered into a partnership to offer robo-advisory services through their mobile wallet, Dash.

Long live wealthtech

The number of wealthtech deals globally is on track to surpass 1,000 in total this year based on the number of funding rounds completed in the first half of 2022, up 65 per cent from 2021, which was already a record year with close to $25billion invested in more than 600 deals.

Many wealth management firms are now spending more on technology than any other area of their businesses making tech the most important aspect of managing and growing their firm. Wealthtech investments and acquisitions will continue to allow them to leapfrog and accelerate wealth management firms gains in scale, commercialisation, infrastructure and value and client experience.


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