Re-imagining the wealth management stack
By: Katherine Wilson
Tags: Enterprise Technology, Startup, Venture Capital, Wealth Management, Fintech

It is an exciting time to be working in the wealth management industry. There is a seismic change underway with new technologies that make it easier and more affordable for firms to both offer services to clients who historically would not have been able to access their advice, and to look after their clients’ interests better.

We think this presents a huge opportunity for forward thinking companies and individuals who are willing to embrace the change and challenge the way things have ‘always been done’ by validating and adopting best of breed emerging solutions in their firms.

This post goes into the background of how we have got to where we are today, and why change is happening now. We will outline our thinking in more detail in subsequent articles on specific pieces of the puzzle, but our working thesis is that:

the future stacks powering wealth business will not rely on one-to-one integrations, but be flexible open components connected by an underlying data infrastructure,

some firms will choose which components to prioritise (planning, risk, construction etc) so any point solutions must be both simple to plug & play and leverage channel partnerships,

most firms will have 2–3 core systems and will rely on these providers to have selected the best in class components and include them as part of their suite,

the direction of travel is towards truly bespoke portfolio construction and advice so this must be supported by tech providers,

adviser relationships will remain key, so the role of technology should be to support and not displace them.

Why do people use wealth managers and advisers?

Before we dive into the detail of some of the new innovations shaping modern wealth management, it’s useful to first take it back to basics and ask the question — why do people use advisers and wealth managers in the first place?

The simple answer would be to achieve their financial goals…. But it’s a much more complex question than it seems. Every person or family has different goals and requirements, as well as different levels of financial literacy. This means that while one family might need help with basic planning and saving goals, another might need complex cross-jurisdictional tax advice for multi-currency earnings and hedging. Layering on top of this the fact that everyone has different risk profiles (how comfortable you are with the trade-off between possibly losing money to earn potentially higher returns), knowledge and experience, country specific regulations and fiduciary duties a manager has to understand where their clients sit on this spectrum — it gets complex very quickly.

This is also just the first step. A manager then needs to review these goals and construct an investment and savings plan by reviewing the many millions of stocks, bonds, ETFs, mutual funds and myriad of other investment products available. They then must work out which are the best, check for tax implications, put them into a portfolio with the optimal mix (based on both goals and risk appetite), and keep track of this whenever there is a change in markets or of the clients circumstances or preferences. Phew! No wonder most advisers won’t help a client unless they have over $100,000 available to invest. On an ‘hours worked’ basis, they would be out of pocket helping anyone with less.

How do advisers currently cope?

This is the natural next question and, in our view, goes a long way to explaining why there are such large and publicly scrutinised advice gaps and industry conflicts. In fact, according to research by McKinsey, the annual revenues generated by intermediation in the wealth segment are more than double all market infrastructure (trading, clearing, settlement etc) combined. A simple Google news search shows you how much of a focus this is for the press, regulators and governments alike — links here and here. To solve this, wealth managers and advisers need to be able to do more with less. This is where technology can help.

At present, most advisers and wealth mangers mainly rely on 3–4 core systems (usually a CRM, execution platform, portfolio management / reporting engine) but have multiple other point solutions which feed into these for specific tasks. These might include client onboarding, annual suitability, cash flow forecasting, tax planning etc. Another key piece is a tool for general financial planning which can feed into either the onboarding process, or ongoing management depending on the tool chosen.

© Illuminate Financial — non-exhaustive illustration of the wealth stack

Precisely how this fits together will depend on the firm and providers chosen but, generally speaking, while there are often specific integrations between tools (for example a risk score provider that integrates with a portfolio management platform; or a chatbot that can feed into a CRM client portal) these are largely one-to-one, meaning data is trapped in silos.

Why are simple questions so hard to answer?

Due to the current wealth stack architecture, advisers often re-key information manually from one system to another to get a complete view of their client’s wealth. This is clearly not ideal. Not only does this risk errors, it soaks up time that could otherwise be spent better managing relationships and makes seemingly simple questions very hard to answer.

Am I on track to reach my goal? What had been the biggest drag /contributor to my performance? What fees have I paid and where? What income have I generated? Can you show me the split of my holdings? If stock markets fall 20% what will happen? What if I only want to invest in companies that are socially responsible?

Being able to respond to these questions quickly and in real time intuitively feels like something that an adviser should be able to do. The reality is that with current systems the way they are — it takes days of work in excel.

Change will not happen overnight but given the increasing scrutiny from regulators, fee pressure, advances in technology, and new entrants in the direct to consumer landscape; the scene is set.

What has changed in the direct to consumer market?

Whether or not you believe the B2C fintechs making headlines will survive the test of time, they have undeniably tapped into something and show the time is now. Their combination of lower fees, easy online access, promise of ethical investments and reach into previously un-served segments of the market have attracted a new breed of customer in droves and piqued the interest of VC investors and incumbents alike. The latest market map from CB Insights gives you an idea of how much is going on.

Although we do not believe that these direct offerings will ever displace human wealth managers, we do think the competition has re-set the entry bar and consumer expectations. Micro-savings, robo portfolios, personalisation of goals, online portals, ESG screens can become new tools advisers and managers can add to their arsenal as they help their clients.

How can a bank or a large established business adopt?

There is no easy answer, but we believe there is a huge opportunity for B2B companies who can help the industry re-architect itself with a new breed of data architecture that connects information and allows the simple questions to be answered.

With the right infrastructure and tools in place, advisers and managers will be able to cut down on the admin, grow their businesses and get back to doing what they do best — managing relationships and helping clients understand their finances.