Impact of Fintech on Wealth Management

As I travel the country and spend time with advisors, partners, and industry counterparts, there is a lot of dialogue about how fintech is disrupting wealth management and how the advisor industry is evolving. All the discussion about evolution got me thinking about lessons from Charles Darwin, the famous naturalist who taught us that it is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.

The strong and cunning may win the short-term battles but, over the long term, Darwin’s lessons suggest that those who are not able to adapt may wind up on the endangered species list. In this article, I take a look at the impact financial technology has had on wealth management and what financial advisors can do to ensure they continue to flourish in a swiftly evolving industry.

The Rise of Fintech Wealth Management

For years, the industry has been predicting the disruption of the financial advisor model, all the way back to when commissions were no longer regulated in the '70s, which led to the rise of the discount broker. The '80s and '90s brought forward no-load mutual funds, and the Internet gave us online trading. And now, here in the 2000s, we have the emergence of the robo-advisor, or the computer-automated investment platform, giving cynics even more ammunition to predict that advisors will go the way of the travel agent or taxi driver.

I am much more optimistic on the future of the financial advisory profession. Despite all of these financial services and technology innovations that have the potential to put human advisors to the test, their role and significance in assisting investors navigate complexity and meet their goals have only increased in demand. Advisors have proven time and time again that they can adapt to these structural changes quite effectively. In fact, advisors have been able to respond to these changes by engineering new models that take advantage of commission and technology disruption.

While some studies indicate that the number of financial advisors is expected to remain constant or grow moderately over the next five years, growth in assets managed by advisors shows that the industry is alive and well. The Registered Investment Advisor (RIA) Benchmarking Study from Charles Schwab shows that assets under management have increased consistently, with a five-year compound annual growth rate (CAGR) of 14.5% from 2015 to 2020.

Advisors' Ability to Adapt and Thrive

Advisors should still take note of the change around them and understand how it could compel them to once again establish their ability to adapt and flourish. Each year, the fintech rhythms only thump louder. This has played out not just in the media, but with investment dollars. Global investments in financial technology ventures amounted to $210 billion, in 2021, according to KPMG Pulse.2 The fintech industry segments include payments, cybersecurity, insurtech, wealthtech, regtech, as well as blockchain and cryptocurrency.

This surge in fintech industry investment may have something to do with the rise of robo-advisors. According to industry research, the total valuation of robo-advisors was roughly $4.51 billion in 2019, and it's estimated to grow to $41.07 billion by 2027.

The Impact of Artificial Intelligence (AI)

The Future of Business: The Impact of Artificial Intelligence (AI) - SDK  CPAs

While the robo-advisor mania is well documented, the proliferation of artificial intelligence (AI) tools impacting the wealth management landscape has made a dramatic entrance into the financial trade press. While it might be early, AI’s role in financial advice is an area to monitor. The launch of the predictive analytics tool from Salesforce, Einstein, provides the industry cause to consider the role of AI in supporting advisors with where to focus or automating tasks.5 The same is true with IBM Watson’s partnership with H&R Block.6

From my standpoint as an advisor fintech leader, the rapid and ongoing innovations in technology are thrilling. For advisors, the more thrilling innovations are about providing scope and eradicating behind-the-scenes labor to plan for conversations with clients. Many advancements support the advisor-client relationship directly. High-net-worth investors, the golden spot for most registered investment advisors (RIAs), are interested in digital financial advice of some type and benefit from new developments.

Read Also: Prepare for the Future of Fintech

What Fintech Means for Advisors

What does it all mean for advisors? First, it’s evident that investors expect digital tools as part of their relationship with their financial advisor. They appreciate online collaboration and digital tools in other aspects of their lives, so why shouldn’t they when it comes to administering their wealth?

With Betterment and other firms advertising in conventional media, investors are exposed to modern, understandable, and easy-to-use tools that display performance. While user design has been commonplace in consumer packaged goods firms for years, it has only more recently become a sought-after skill in the financial services industry.

Second, advisors need to ensure they are communicating with clients in new and different methods. Not all consumers have time to come into the office. Clients who are still working usually expect interactions with their advisors to be efficient and direct. They also expect to be able to examine information on their own at any time through a client portal and use online collaboration tools to check in with their advisor. This on-demand access provides an ultimate level of transparency.

Third, there's the matter of value—more specifically, clients comprehending the value that their advisors deliver. Many advisors offer much more than investment allocation and portfolio construction, but it’s not obvious whether investors understand all the “extra” support they are receiving.

What Fintech Means for Clients

Fin-tech : A new era for millennial

Based on a 2020 generational survey, 41% of all generations surveyed would contemplate using a robo-advisor. However, close to half of generation Z and millennials are confident in allowing a robo-advisor to make personalized investment decisions while only a third of Generation X and 15% of young boomers would be.7 We could discount that since most millennials aren’t confronting the complexity in their financial affairs as their baby boomer parents are experiencing. However, it creates yet another reason why advisors need to continue to develop their trusted relationships. After all, we know that trust and communication are enormous factors in why investors select or abandon an advisor.

If delivered well, clients may benefit in many ways from fintech. In addition to digital experience and transparency, new competition is driving costs down, and digital tools are eradicating overhead and certain manual processes for advisors. Case in point: Charles Schwab Corp. offers robo+advisor product, Schwab Intelligent Advisory, at 28 basis points, or $3,600 maximum, per year. With a minimum of $5,000 investment, the product includes tax-loss harvesting and automatic rebalancing. The premium offering targets mass affluent investors with a minimum of $25,000 to invest, but it still sends a message to the industry that costs matter.

The Bottom Line

My advice to advisors is to grasp on to technology that helps you be more efficient and get closer to clients. After all, technology, when used well, can help you with the seemingly formidable challenges confronting all advisors today—running an efficient and profitable business, demonstrating your value, and leveraging tools for growth. Darwin’s advice remains sensible.