Digital Disruption of Wealth ManagementFebruary 12 2018
The wealth management industry is in the process of becoming digitally disrupted by Financial Technology (Fintech) on all levels. Previously, the regulatory environment had not been conducive to alternative wealth management practices, but this is changing.
A rigorous regulatory environment has been one of the reasons fintech in wealth management has been slow to establish itself. But, the Australian Securities Investment Commission (ASIC) has recognised the growing importance of the fintech sector and is proactively engaging with the sector across all areas of financial services with the establishment of the Innovation Hub. Further recent support of fintech by ASIC goes a long way to opening up financial services to new entrants.
Fintech as a wealth solution is likely to be welcomed by consumers who may have become increasingly disillusioned with traditional wealth management and advice, due to high fees and underperformance.
Early fintech starters
One of the initial impacts of fintech has already been felt with falling personal lending by banks (See Figure 1). Fintech lenders known as peer-to-peer (P2P) or marketplace lenders have launched numerous new market offerings in recent years. P2P lenders or marketplace lending platforms provide consumer loans to borrowers based on their credit worthiness. Investors fund the loans and receive a fixed interest-like stream of income, although credit risk may mean the risk of capital loss or distributions not being paid.
The ease and swiftness with which fintech lenders have been able to capture some of the major banks’ market share was partly driven by the incumbents dragging their feet in challenging the newcomers. Figure 1 shows that banks have seen falling personal loan finance, while non-bank lenders are seeing an increase in market share of personal loans. Marketplace lenders in total have seen growth in personal loans up 50% in 2016/17 with a total of $252 million loaned to consumers.
With a more conciliatory regulatory atmosphere and dissatisfied investors, wealth management is at the ripe stage for disruption with the potential to offer consumer more and more opportunities to invest easily across a range of products.
The changing face of the consumer
Fintechs operating over online platforms do not require face-to-face relationships, which may deter older consumers. But, the changing face of the consumer with the onslaught of millennials, the digital generation and the next most significant generation in the wake of the baby boomers, means that an online service will be highly valued.
Fintechs can offer an improved customer experience alongside lower costs by providing different ways of delivering financial advice. ‘Robo-advisers’ are an emerging fintech influence that has the potential to impact the industry immensely with computer-driven investing, including automatic allocations across a range of exchange trade funds (ETFs). The increasingly popular ‘spare change’ feature also allows daily purchases to be rounded up and micro amounts deposited in an account that connects to the apps and is automatically invested.
Share investing has not been for everyone
Surprisingly a recent Finder survey found that only around 25% of Australians have invested in shares, with men being twice as likely as women. Around 3% have invested through robo-advice apps, of which 7% are Gen Y apart of the millennial cohort. These numbers are small but for something that has only existed in the last few years may indicate that the first time investors are trying investing via apps.
Insufficient funds and costs hold back investors
According to the Finder survey, having spare cash to invest is the major reason share investing has not spread to the wider community, but the cost may also be a factor. First time purchases of “any particular shareholding must be at least $500 worth of shares” through an online broker such as CommSec, plus brokerage. So to make a substantial investment that is diversified across quite a few companies, an investor may need at least $10,000 plus costs. But, lots of small investments can lead to brokerage adding up. And, even if consumers had $10,000 to start an investment portfolio, they might not have any idea of what to buy.
Financial advice through traditional channels is expensive, and most people either cannot pay for it or don’t want to. In the Ripoll Report, which eventually led to the Future of Financial Advice reforms, recommendations were for the removal of most commissions from financial advice. But, despite the banning of commissions financial advice can still be expensive. According to MoneySmart an investor can expect to pay between $200 and $700 for simple advice and between $2,000 and $4,000 for more comprehensive advice. So, the potentially prohibitive cost of face-to-face advice means that 80% of Australians do not seek advice. Technology platforms may be the solution in the form of robo-advisers and other options providing cheaper automated advice ranging from general advice to more personalised financial plans.
Another solution is to buy ETFs offering diversified exposure to an asset class directly through an online broker, in which some millennials are likely to be already doing. But, buying ETFs directly means that the investor is missing advice, ease of transacting and account management, while some fintech apps bundle these services together.
Drivers of fintech in wealth
We have seen baby boomers driving the growth of self-managed superannuation funds (SMSF) and also are more likely to have been early adopters of ETFs, but the younger generation is likely to be making earlier forays into fintechs offering wealth solutions. Due to the size and online capabilities, the millennial generation, which encompasses a period of twenty years from 1980 plus generation Z, the generation after, will be a significant influencer of technological developments in wealth management. They are enticed by low costs, simplicity and ease of use, as well investing in a way that reflects their lifestyle (of being digitally active), which makes fintech apps attractive.
Fee pressure supports fintech
There has been increasing pressure on wealth management fees as the result of the rise of passive investment, including ETFs. Investors including SMSFs have been flocking to ETFs with the RBA data showing that the size of the market is over $25 billion in 2017. Reasons that make ETFs popular are flexibility, cost and liquidity. Many ETFs are passive, and the fees are a fraction of active funds or even cheaper than the underlying managed fund, which the ETF replicates. The growth of the ETF market provides solid support of fintech in wealth management, as investors will be open to the fintech benefits of being able to invest in ETFs more efficiently and at a lower cost through an app.
The allure of apps but watch the fees
Investing via apps is an option that many will welcome due to the accessibility, especially the technologically advanced investor. Fintech apps usually have a smaller minimum investment amount, but if there is a fixed fee structure then unless a substantial amount is invested, it may work out expensive. So, check the fee structure before investing. Apps allow accounts to be opened online and may offer robo-advice, resulting in an automatic allocation across a range of ETFs depending on the risk profile of the investor.
The regulatory environment of the industry has provided wealth, and asset management a degree of immunity to technological disruption but changes have started to take shape. Although only a small number of apps existed a few years ago, the numbers are snowballing, as investors are embracing the online experience, supported by the changing face of the consumer who are more digitally active.