The wealth tech market, which includes everything from robo advisors to public trading apps and financial advisor infrastructure tech, was already approaching an inflection point as consumer views on wealth management have changed over the last decade.
Consumers want more real-time digital solutions and custom portfolios and options, which are still slowly emerging. This attitude shift has created many opportunities for investors to help innovate the incumbent industry on its long road ahead.
Nearly $1.6 billion was invested across 60 wealth tech deals in the first half of 2020, according to data from CB Insights. While still a small sliver of overall fintech investing, which totaled $17.2 billion in H1, wealth tech continues to grow. It has more than doubled since the first half of 2017, when $737 million was invested across 48 rounds.
Investment is poised to see close to if not the highest investment total yet in 2020, and many believe that companies are only at the beginning stages of an innovation evolution for the sector.
“Wealth tech is a sector I’m really excited about,” said Peter Johnson, a partner at Jump Capital. “There are a lot of changes going on in the wealth management tech area.”
Jump recently invested in a $33 million Series B round for Chicago-based M1 Finance. The start-up provides a consumer-facing investing and money management platform. The firm also recently exited Personal Capital, an online financial advisor and personal finance platform for $1 billion when it was acquired by Empower Retirement in Q2.
Johnson, a veteran operator of the wealth management space, has dealt with the problems in the industry first-hand and has seen how the industry has worked to change over the last few years.
“When I worked with wealth managers and asset managers, I had a pretty good view of the industry and saw all the opportunities to improve what individual investors got. At the end of the day people got poor products, high fees and poor advice,” Johnson said.
Years of groundwork
Wealth tech has arguably been one of the slowest areas to innovate within fintech due to its fragmentation and vast scale, but market changes over the past few years laid the infrastructure for the current drive toward innovation.
Dan Petrozzo, a partner at Oak HC/FT, said that there have been multiple trends that helped foster this growth. One of which was the creation of robo advisors, the fintech buzz of the early 2010s, which opened wealth management services to a wider audience.
He added that many financial advisors were either at a behemoth company like Merrill Lynch and Fidelity or worked at a local single-location firm which made it hard to sell technology or software to either end of the spectrum, but this has changed.
“What’s happened over the last decade is those advisor firms have been rolling up,” Petrozzo said. “If you had a solution and you wanted to sell it to all of these mom and pop advisors it was hard because there was no centralization. I think more companies, than traditionally, will go after that area.”
Johnson added that with these changes has come greater opportunity for segmentation of the market, which allows for more innovation aimed at customers with varying degrees of wealth.
However, despite the market’s progress, the coronavirus has shined a light on its current inefficiencies and how much further wealth management has left to go to be a meaningful digital player.
Exposing a paper-based system
“It’s very apparent today through covid-19 that wealth management is broken,” Rob Antoniades said. “It’s an old model. It’s a very transaction-based, paper-based, in-person based market. When you think about the world today, especially post coivd-19, it’s the exact opposite.”
Antoniades is a general partner at fintech-focused Toronto venture firm Information Venture Partners. In July, the firm invested in San Francisco-based Jirav, a B2B financial modeling and planning tool, in its $8.3 million Series A round.
While the virus has exposed these inefficiencies, multiple investors said the industry was already trying to innovate for the future challenges the incumbent industry is rapidly approaching.
“For the traditional financial advisors, one of the biggest trends in the coming years is how do those individual financial advisors keep up in a world that is more personalized and online,” Johnson said.
One thing that is on the minds of multiple investors is how the industry will adapt to remain relevant as the current swath of generational wealth is passed down to younger and millennial investors who have different mindsets and are unlikely to seek the same wealth management products and solutions.
“One of the things that we have been keeping an eye on is this transition from traditional investors to millennials,” Antoniades said.
David Jegen, a managing partner at fintech focused F-Prime Capital said this is an area his firm is interested in, as well.
“When the wealth transfer happens how do the kids respond? I think it’s going to be a pretty big shift to a new type of advisor with consumer-friendly solutions that kids or investors prefer,” Jegen said. “Many of the names we see today like [the robo advisor] Betterment will be inheritors of that wealth transfer. They will have the tools that make the next generation likes to use.”
These younger investors are not just looking for a more digital solution, many are also looking for customized financial products where mutual funds and bonds just won’t cut it.
Petrozzo said that these individuals are looking for more flexible solutions, not unlike what institutional investors ask for, in terms of made-to-order portfolios that may have a preference to ESG or might avoid certain stocks or markets.
“It’s really exciting to think about the tools that need to be built to allow people to be able to create custom portfolios at scale, there is really nothing out there yet,” Jegen said. “You can’t change your Fidelity Contrafund and remove the things you don’t like.”
Antoniades predicted that AI companies and solutions will come into play to help create these custom portfolios and also keep them balanced, transparent and on track.
“We were looking for technology that automates the rebalancing of a portfolio and using AI to construct a better portfolio for the individual,” Antoniades said. “I think that is going to happen reasonably quickly.”
This transfer of wealth is just one of the areas fintech investors anticipate innovation over the coming years. Another area ripe for change is in the retirement sector.
“Over half of individual assets are in 401k plans,” Johnson said. “They are unquestionably behind, years behind on the individual side. That will be one of the next places we will see innovation.”
Petrozzo added that they are also interested in the space and led the $30 million Series C round into retirement benchmarking tool NextCapital in 2018. Jegen agreed and said F-Prime is looking into the space, as well.
Investors also foresee change and technology advancement heading to the institutional and alternative money management space in the future. Petrozzo cited companies like iCapital, which connects high-net-worth investors to alternative asset classes, as an example of potential innovation to come.
“A little further out, but bringing technology to pension funds I think we are going to see a massive amount of investment into more efficient pension fund management,” Antoniades said.
Other areas investors are keeping watch for are the further integration of cryptocurrency into wealth management and the increase of start-ups focused on financial literacy and planning tools for consumers.
“I think we are overall still in the early stages,” Antoniades said. “There are a few things that are more mature like robo advisors in the US, but you’ve probably identified the five companies that are going to succeed. Wealth tech as a sector, we are out of diapers, but we may still be in preschool or perhaps kindergarten.”
While the pandemic might show the broader venture ecosystem the innovation that needs to happen in the sector many of the investors saw the writing on the wall years ago and look toward the opportunities that will continue to emerge as the pandemic fades.
“The whole wealth management ecosystem needs to change to reflect the world that we are in and covid-19 has been a perfect accelerant,” Antoniades said. “You will see a lot more interest in wealth tech going forward because there will be a lot more spending by financial institutions.”