The WEALTHTECH Book

The FinTech Handbook for Investors, Entrepreneurs and Finance Visionaries

Susanne Chishti, Thomas Puschmann

• Publisher: Wiley
• Year: 2018
• ISBN:
  9781119362227
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Finanzwesen

Get a handle on disruption, innovation and opportunity in investment technology

The digital evolution is enabling the creation of sophisticated software solutions that make money management more accessible, affordable and eponymous. Full automation is attractive to investors at an early stage of wealth accumulation, but hybrid models are of interest to investors who control larger amounts of wealth, particularly those who have enough wealth to be able to efficiently diversify their holdings. Investors can now outperform their benchmarks more easily using the latest tech tools.

The WEALTHTECH Book is the only comprehensive guide of its kind to the disruption, innovation and opportunity in technology in the investment management sector. It is an invaluable source of information for entrepreneurs, innovators, investors, insurers, analysts and consultants working in or interested in investing in this space.

• Explains how the wealth management sector is being affected by competition from low-cost robo-advisors

• Explores technology and start-up company disruption and how to delight customers while managing their assets

• Explains how to achieve better returns using the latest fintech innovation

• Includes inspirational success stories and new business models

• Details overall market dynamics

The WealthTech Book is essential reading for investment and fund managers, asset allocators, family offices, hedge, venture capital and private equity funds and entrepreneurs and start-ups.

1
Introduction

Executive Summary

WealthTech can be narrowly defined as the technology/software used to help investors make better decisions when it comes to where they should put their money. In this book we define WealthTech much more widely as the impact that technology has on the global investment and wealth management industry, including private banking and asset management. WealthTech includes known business-to-consumer (B2C) models such as crowd-funding, alternative lending and robo-advisory.¹ However, it also includes business-to-business (B2B) enterprise innovation and technologies in the areas of blockchain, artificial intelligence and big data analytics, which empower asset managers to achieve better returns at lower costs for the benefit of their customers. This part will provide you with an introduction into the future of this sector, which controls global assets of more than US$70 trillion.²

As much of the financial industry from the retail sector has started to transform, the asset management sector is now experiencing the changing tides of technology too. But this type of disruption is different from what we have seen in the past, as it is now more about FinTech partnerships and how to counter threats from new business models and tech giants. Alibaba’s four-year-old Yu’e Bao, for example, now has more than US$200 billion of assets under management and thus is the world’s biggest money market fund, overtaking JPMorgan’s U.S. government money market fund, which has US$150 billion of assets under management. Another example is WeChat, which already offers wealth management services to its clients over its platform.

WealthTech is not just for millennials, even the older generations of high-net-worth individuals (HNWIs) and ultra-high-net-worth individuals (UHNWIs) are taking a keen interest in it. Too often, wealth management firms try to appeal to millennials using the same marketing strategies that worked on baby boomers, by relying on their brand name and email communication. This “one-size-fits-all” approach does not work. Otherwise, firms risk losing the US$30 trillion in generational wealth transfer set to occur over the next several decades. Profitability is a major concern, and 2017 has tested FinTech companies – especially in the robo-advisory space – that are relying solely on lower costs to compete. Robo-advisors will challenge existing financial advisors and private banks long-term, but to be effective, the robos have to offer both “digital services” and strong credibility. However, WealthTech does not just include robo-advisors. To help you visualize the future, this part also includes a fictional email from a CEO to his company employees highlighting how artificial intelligence (AI) will be integrated into the company. The CEO’s message reflects new organizational priorities in the company around AI, technological choices and job creation.

Summarized, in this part you will get an introduction to WealthTech, both why consumers are driving digitization in wealth management and how established businesses can respond to it with innovative solutions. Following this introduction, the second chapter focuses on digitizing client advisory and robo-advisors, the third chapter on digitizing wealth management operations, the fourth chapter on digital platforms, products and ecosystems, and the fifth chapter on blockchain applications in asset and wealth management. While these four chapters each have a focus on digitizing specific areas of wealth management, the sixth to ninth chapters refer to more general areas like founders’ success stories, enterprise innovation, global WealthTech markets and the future of WealthTech.

Notes

¹Source: Puschmann, T. (2017). “Fintech”, Business & Information Systems Engineering, 59(1), 69–76. ²Source: BCG, “Global Asset Management 2017”, http://www.agefi.fr/sites/agefi.fr/files/fichiers/2016/07/bcg-doubling-down-on-data-july-2016_tcm80-2113701.pdf.

The Augmented Investment Management Industry

By Patrick Donaldson

Head of Market Development, Wealth Management Asia, Thomson Reuters

Since we are currently experiencing the fourth industrial revolution, we should not be surprised that wealth management is entering a fourth epoch as well. What is particularly exciting about this era is that it offers an opportunity to fundamentally rethink the business of wealth management, rather than simply providing a more efficient replication of what went before.

A brief reminder – the World Economic Forum has defined the four industrial revolutions as: the rise of mechanical power; the advent of electricity and communications; the digital age and the development of modern computing; and finally a new era that builds and extends the impact of digitization in new and unanticipated ways.

The four stages of wealth management are slightly out of step with these. Technological advances have been a constant in the financial services industry, as investors have sought to find the most efficient and effective means of putting capital to work, but we can also discern significant step-changes in the way wealth management was conducted.

The first three epochs of wealth management were, broadly speaking: the hand delivery of documentation; the mechanization of those hand-to-hand processes; and the development of computing solutions.

That first involved the old coffee-house method of investment, where company documents were handwritten and exchanged among patrons. This developed into the old stock exchange trading floor, complete with jobbers and runners to distribute the news. Paul Julius Reuter opened his first office just behind the Royal Exchange in London (it still stands today). The boys he employed to carry news back and forth between the trading floor and his offices were perhaps the first low-latency trading solution.

The second stage was the laying of telegraphic cables across the world, and the use of ticker-tape machines to send information across huge distances. Again, pioneers such as Reuter effectively shrunk the world, providing a new richness and depth of information for investors.

The third era came in the 1960s, when computer networks began replacing the ticker-tape machines and systems such as ILX and Quottron were developed, providing processing power at speed and gathering information from price sources around the world. In the 1990s the internet and the rise of the home computer was followed by the development of online retail brokerage systems, but perhaps more significantly democratized access to data about companies and other investment opportunities. A lot of the information previously prized by wealth managers as sources of insight was now available to the investing public at the click of a mouse.

As wealth management progressed through its various eras, the value proposition also changed. At first, just having a stock price or news was valuable in and of itself. Then, the value came from having information faster. Once data (such as stock prices) became more of a commodity, value was created by analysing the data or combining it with other information such as news or earnings, quickly acting on the analysis.

We are now entering a new era, a fourth epoch, driven by technological advances such as cognitive computing. Whereas the previous eras developed efficiencies in an established process, the technologies available or in development today enable us fundamentally to rethink the process. Rather than simply replicating the established methods of managing wealth, they offer an opportunity to augment these in new ways.

We are at a point where advances in computing power and lower computing costs enable us to apply artificial intelligence, machine learning, natural language processing, neural networks and a host of other tools to everyday tasks. The opportunities for wealth management are genuinely epoch-making.

Clients are Changing

The practice of wealth management basically involves finding ways to protect and build wealth in order to pass it down the generations. As this wealth grows, and as clients’ family trees grow new branches, the number of clients expands exponentially.

The average US investor is in his/her early 60s and that is likely to rise to over 70 within the next few years. More than half of assets managed (53%) are already held by clients who are over the age of 65, “leaving us poised on the precipice of the greatest wealth transfer in history”, as The Fountain of Growth puts it.¹

Meanwhile, the average advisor is in his or her early 50s, with a quarter of advisors already at the typical retirement age. These advisors control 25% of assets. This is therefore a second aspect to generational wealth transfer. Both represent risks to wealth management firms.

First, assets will flow from parents to their children. In this case, wealth management firms need to position themselves to keep these assets in-house. The challenge is in addressing the “my father’s advisor” syndrome, in which a son or daughter feels that their parents’ advisor is out of touch with their views on investing, risk tolerance, how they choose to invest and how they prefer to communicate.

Second, for advisors the risk is that, without proper succession planning, customers m...