Fin-Tech

Wealth Management in
the Modern Age!

Syed Hashim Ali

 Wealth Management
The services provided by an institution (i.e. the wealth
manager) in order to manage the personal finances of
clients (ranging from mid tier investors to ultra-high-
net-worth individuals (UHNWIs)) in order to realize
individual client goals. These goals can be diverse and
will differ by individual. The products and services
required to realize
these goals will also differ by individual client

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 Exchange Traded Fund
An exchange-traded fund (ETF) is a basket of
securities that trade on an exchange, just like a stock.
ETF share prices fluctuate all day as the ETF is bought
and sold; this is different from mutual funds that only
trade once a day after the market closes. ETFs can
contain all types of investments including stocks,
commodities, or bonds; some offer U.S. only holdings,
while others are international. ETFs offer low expense
ratios and fewer broker commissions than buying the
stocks individually

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 Robo Advisor
A Robo-Advisor is a self-guided online wealth
management service that provides automated
investment advice at low costs and low account
minimums, employing portfolio management
algorithms

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 Why Now

 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
 The lower levels of innovation can also be attributed to the scattered nature of the wealth management value chain.
Owning all aspects of the B2C value chain, banks have been more vulnerable to disruption. In wealth management,
multiple players tend to own specific parts of a B2C chain, making these markets more complex and less attractive
 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
 WeChat, 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
 Firms risk losing the US$30 trillion in generational wealth transfer set to occur over the next several decades

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Why Now

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 Transformation Process
 As wealth management progressed through its various eras, the value proposition evolved. 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 analyzing the data or combining it with other information such as news or
earnings, quickly acting on the analysis
 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
 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
 The good news is that the expectations of the coming generations are very different. Younger clients are not
looking for as much one-on-one attention
 According to one study, millennials and generation-Xers (gen-Xers) are less likely to want to discuss investing
strategies with a professional (49% and 48%, respectively) compared with baby boomers and mature
clients(61% and 67%, respectively)

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Reasons Digital WM Will Become a Worldwide Standard
 Low interest rate environment, the historically high management fees of mutual funds or wealth management
mandates become more visible
 The internet has brought an incredible transparency into this sector. After 20+ years of internet and comparison
portals, clients of all age groups use these tools for investments: comparison of fund performances or wealth
management performances, or performances and ratings of client advisors on social media portals. The
inherent complexity of the capital markets and investments has shielded the industry for a number of years,
until now
 Technical progress in the past 10 years is an enabler of change in the wealth management industry too
 Technology leads and has led to social changes. If a user has access to information from a neutral source (i.e.
independent from a product provider), he will use this information to challenge institutions, their data quality,
their recommendations, etc. While in the past what a banker or wealth manager said was taken for granted, it is
now being questioned
 The offers of the incumbents do not fit into the zeitgeist any more. Brick-and-mortar branches in reality always
were cost factors
 Regulation has also helped to kickstart the robo-advice movement. Nowadays an initial meeting with a client
advisor is bound to be a lot longer than 10, 20 or 30 years ago due to regulatory obligations. By complying with
current regulations, market participants have a long compulsory journey to reach execution. This makes any
digital solution with only a few clicks or a few sentences with a chatbot – like Amazon’s Alexa – a lot more
attractive
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Reasons Digital WM Will Become a Worldwide Standard
 Regulation is also responsible for a phenomenon coined the “advice gap”. As the time required for a regular
investment advice conversation is very high, banks and asset managers have started to increase the minimum
assets under management often above $100,000. This turns clients with liquid assets of $100,000 or less into an
attractive target group for digital players
 The existence of a competitive market of ETFs was one of the key drivers of robo-advice. Only a widely
accessible low-cost product alternative to mutual funds enables digital players to add their automated solutions
and still be significantly lower in price than actively managed funds or mandates
 Data is the oil of the future. Wealth data by nature is of particular interest. In the past, data was not available –
nowadays, it becomes available more and more due to regulation (Payment Services Directive 2 (PSD2) as a
start) and changes in society: data sharing becomes the new norm and banking cannot stay behind such a
powerful social trend
 Brands are even more important. They become more relevant in the digital than in the offline world, as the next
competitor is only one browser window away. Price comparison tools are used to filter out providers by the
buyers, who are price sensitive. For users who favor quality, prime brands give the highest safety net when
buying online. The risk of fraud is simply too big. Translated into the financial world – where trust is of even
higher importance – this means that either the provider of the financial product (i.e. the ETF) or the
cooperating bank should be a well-known firm, as this creates trust. If the sponsor of a robo-advice tool, on the
other hand, is a prime brand itself (like a luxury brand or a global retail or product brand), then no-one will
question the functioning and seriousness of the offer
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Neo Banks Cons

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 Hybrid Advice Model

 In its simplest form, the hybrid approach combines the best components of human-based financial advice and digital
advice, offering a flexible and tailored wealth management solution to clients of all demographics

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 Robo Advisor, What, How, Where, When

 Rob advisor is an electronic service that offers algorithm-based and automated wealth management advice that does
not involve humans. It mainly provides portfolio management advice and is a low-cost service attracting cost sensitive
users because it is accessible online and does not require a high AUM balance
 Rob advisors can also use complex algorithms to analyze client data, leading to personalized asset allocations and
financial plans
 A robo-retirement is a rob advisor that manages a person’s retirement plan with algorithms. Instead of charging 1% to
2% of the total assets in the portfolio, as a traditional financial planner would, it charges a fee as low as 0.14% to
0.15% of the total assets under management and has no minimum asset requirement. However, robo-retirement is
available only for assets with quantifiable risk. It cannot deal with unquantifiable risks such as a sudden market crash.
Clients who need social security and tax guidance might use a human financial planner or a hybrid rob advisor.
Reference Hybrid Approach
 Robo tax loss harvesting, on the other hand, is an automated service for investors who want to pay the lowest possible
taxes in non-tax sheltered accounts
 Roboadvisors have the potential to disrupt the market. Existing wealth management firms with wide distribution
capabilities and deep pockets are now collaborating with financial technology companies to develop roboadvisors, and
some are developing them in-house
 Robo-advice can affect wealth management companies’ business models. Investors may not be willing to pay a
premium if they can understand the real value of human advice and the difference between the robo vs human advice

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 Gamification and Financial Management
 Gamification can be seen as an effective tool for influence in order to drive certain actions. Gamification is the
process of applying games or game-like elements and principles to other non-game areas of activity, oftentimes
to increase user engagement and provide instant gratification
 Gamification tends to work best when it is applied to one simple, small aspect of behavior (e.g. persuading the
health insurance client to go for a walk rather than sitting down with unhealthy food. Yet, if financial advice is to
be genuinely useful, it needs to be based on the user’s complete financial picture; for example, encouraging
people to invest more is generally good, but not if they are carrying large levels of credit card debt
 The solution is to create incentives for individuals to upload their complete personal balance sheet. Normally
this would be a tedious exercise. To be successful this onboarding process has to be itself turned into a game,
with users rewarded for completing sections and encouraged to drop the process and return later using any
device
 We believe that gamification can effectively both support the targeting of specific desired customer segments
as well as providing the motivation to make financial management approachable and fun for rookies.
 If people will spend time running a virtual farm, we should be able to encourage them to play a similar game
where in actuality they are managing their own financial situation
 Reference: Enders Game

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 Artificial Intelligence in Wealth Management
 The term AI was coined in 1955 by the American computer scientist John McCarthy, based on the idea that
“every aspect of learning or any other feature of intelligence can in principle be so precisely described that a
machine can be made to simulate it”.
 To put it simply it refers to systems that have a certain capacity to digest large volumes of complex,
unstructured (real time) data, which enables computers to read, write, speak, listen to, see and interpret that
data
 The main drivers for the big data revolution we have already witnessed are volume, velocity and variety of data
 From a client’s perspective it is about better (i.e. faster, more objective and individual), cheaper (with lower
costs resulting from automation) and convenient (anytime and anywhere) advice
 Onboarding and Profiling: Profiling systems can use behavioral analytics to undertake specific personality
analysis, asking clients simple and visually supported questions, or use speech recognition software to assess
clients’ risk preferences
 Portfolio Construction and Management: an area where AI has been used for quite some time already and will
play an even bigger role going forward. High-frequency trading, sentiment analysis, network analysis for
portfolio optimization, etc. – there are a lot of examples for its application, despite earlier limitations like
struggling to distinguish news between the actress Anne Hathaway and Warren Buffet’s Berkshire Hathaway.
While there have been debates like fundamental vs macro and passive vs active investing in the past, this time
it’s about AI replacing modern portfolio theory with something completely new

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 Artificial Intelligence in Wealth Management

 Communication and Reporting: Financial firms have great teams of research analysts, strategists and portfolio
managers, yet they all struggle to get their output to clients in relevant and convenient ways. Using speech or vision
processing, AI will play a major role in changing the way financial information is communicated. Chatbots will be used
not only to automate major elements of the customer interaction, for example providing clients with the latest insights
and performance reports, but also to come up with alerts for individual portfolios and holdings
 Talking about AI and automated processes, there are genuine concerns about their systematic risks and over-reliance
on computer models, algorithmic trading programs have caused serious volatility and flash crashes in the past
 Money, and what we do with it, is a highly emotional affair and sometimes completely irrational. In providing
emotional support and dealing with feelings, advisors still have an advantage over machines
 Another aspect of AI and automation is that they can be perceived as rather impersonal. But this is an argument one
can easily turn on its head: using AI, individual investment proposals will be far more personal than many of the
standardized solutions offered so far
 AI will play a huge role in helping wealth managers to better communicate and articulate their value proposition,
combining the best of customer relationship management (CRM), portfolio and risk management tools, in order to
provide clients with better services and more substantiated advice

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Mobile adoption

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Mobile adoption

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 Changes in Access to Products
 With technology, investors can use online wealth management and apps to decide where to place their money,
with no need to seek a financial advisor’s advice. Financial technology companies like Wealthfront, Betterment,
and Nutmeg, offer an easier and cheaper way for everyone to try their hand at investing
 Financial technology apps allow financial products to be grouped by themes so that investors can choose a
portfolio based on their preferences and values. For example, apps can have groupings like “sustainability”,
“clean energy”, or “sharia compliant”
 Financial technology innovators like Wealthfront or Betterment can help reduce information asymmetry,
providing customers with value added products
 Retail investors now demand access to the same strategies and asset classes once restricted to wealthy
investors. For the past five years, financial technology start-ups have been entering the market to provide
access to investment solutions to everyone
 Some financial technology start-ups also offer alternative asset classes, like becoming creditors in lending
platforms. Some companies also provide analytics so that investors can research and test their strategies
independently. In a way, we could say that fintech is democratizing access to investment products

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 Novel Use Cases: Investing “Change”

 California-based Acorns is an app, created by Walter and Jeff Cruttenden, for people who are anxious about and
intimidated by investing
 Acorns’ users connect all their credit or debit cards, and even checking accounts, to the app. Acorns uses the change
from purchases made using these cards and checking accounts to invest in low-cost exchange-traded funds. For
example, if a user spends $11.49 on lunch, they pay $12, because Acorns invests the 51 cents difference.
 On average, users invest between $30 and $180 per month using this method alone. They can also invest more money
by setting up automatic and regular deposits or make one-off large investments using their checking accounts.
 Acorns charges its users $1 per month plus up to 0.5% of their total investment each year.
 This idea is also being followed by banks, for example, HSBC has started offering an app having the same functionality
in the United Kingdom

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 Novel Use Cases: Investing as a Game

 In the past, the stock market was exclusively for wealthy individual investors and large institutions
 However, with the advent of technology, everyone can invest in stocks
 Vestly makes stock investing a game
 An individual can pick virtual stocks for their portfolio. They earn points based on the performance of these
stocks and learn about stock trading without losing real money
 They may earn up to $3000 if their portfolio is ranked in the top 100 at the end of each month
 Similar rationale is being followed by youth focused brokerages in Pakistan i.e. KASB. (Virtual Portfolio Option +
Cash Prizes for investment competitions.

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Novel Use Cases: Personal Financial Management

 Personal Finance Management includes various services but often refers to tools that assist users in their
saving, budgeting, and investing decisions. PFM tools can be bank provided, basic third party apps, complex
third party apps, and aggregator tools. Aggregators and challenger banks provide the most exciting
developments
 Although banks may not realize that personal finance management tools are valuable only when linked to other
services, challenger banks do and put these tools at the center of the user’s mobile experience
 Personal finance management tools do not provide real insight into a person’s financial situation if they are only
based on account information. With no aggregate information, their functionality will not mature as users
expect or want
 In Europe, the Second Payment Services Directive (PSD2) is opening up the evolution of the PFM tools by
mandating open banking. Innovative financial technology start-ups may be able to move quickly to make other
mobile apps redundant
 Mint is the leader for PFM. It has more than 20 million customers and helps its customers understand their total
financial picture, looking at their expenditures, assets, and incomings. The app even allows for paying bills, can
provide financial advice by linking to other apps such as LearnVest and Credit Karma, and even offers credit
cards and third party loans

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 Startup Focus: Betterment

 Registered in New York as an online investment advisor, Betterment offers its customers a fully automated and
diversified investment management solution at a lower price than that offered by the traditional wealth manager
 It does not employ any financial advisors or sales representatives
 Betterment invests in fixed income ETF (Exchange-Traded Funds) and passive index funds. It offers tax-advantaged and
taxable investment accounts that include different retirement accounts. To optimize its portfolio, it uses mathematical
models that optimize investor returns in various ways, considering the timing of trades, asset allocation, and
diversification
 Betterment does not require a minimum investment amount. It charges between 0.15% and 0.35% of an investor’s
total investment. For example, an investor can expect to pay $150 if they have an account balance of $100,000
 Betterment launched Betterment Institutional, a B2B offering, in October 2014. It became the first robo advisor to
reach the $5 billion mark in July 2016

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 Startup Focus: Wealthfront

 Wealthfront is Betterment’s main competitor. Based in Redwood City, California and founded by Dan Carroll and
Andy Rachleff in 2008, it is another automated investment service company. As of September 2019, it had 20
billion US Dollars worth of assets under management
 Wealthfront was initially a mutual fund analysis company but transformed itself into a wealth management
firm. It started offering tax-loss harvesting in December 2012 for customers with an account balance of at least
$100,000. Furthermore, it collaborated with the State of Nevada in 2016 to launch a tax-advantaged college
savings plan
 Wealthfront doesn’t offer its products and services to financial advisors like Betterment does. According to
Wealthfront’s spokesperson, the company aims to create a standalone direct-to-consumer business, so it has no
plans to expand to service financial advisors

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 Startup Focus: Robinhood

 Robinhood has positioned itself as a stockbroker for the millennial generation. It has an app that allows its users to
transact individual stocks at no cost. Launched in December 2014 through the Apple App Store, it has since launched
an Android app
 Robinhood aims to encourage the millennial generation to invest by offering a way to transact stocks with minimal
knowledge and effort
 However, some critics are skeptical about the idea because inexperienced investors could lose money easily.
Furthermore, the younger generation has to deal with student loan debts, and they do not typically have high paying
jobs. As such, young professionals cannot afford to lose money in stock trading
 Robinhood may make compromises because it does not charge investors for the transactions, so it may not be able to
provide the necessary tools, customer service, and research to its customers
 It stays operational because it employs minimal workforce, earning interest on the unused cash deposits from the
investors’ accounts. Furthermore, it has millions in cash from venture capitalists’ investments
 Robinhood is planning to charge 3.5% interest for margin trading and $10 per trade for phone-assisted trading. In
September 2016, it launched Robinhood Gold, an improved version of the app, for a monthly fee of $10. The new app
allows users to trade even when the stock market is closed and provides instant withdrawals, lines of credit, and
immediate deposits

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