The Goldmine Potential of WealthTech 2.0

By: Daniel Fraai, Kaushik Subramanian, Marnix van der Ploeg, Tom Mendoza, Alexandre Pons

WealthTech has been a talking point in finance for well over a decade, yet it remains a paradox. Where the real wealth is, there isn’t much tech. And where the tech is, there isn’t much wealth.

During what we might call WealthTech 1.0, a generation of robo-advisers and zero commission trading platforms grew up around the idea of democratization. Wealth, they claimed, would be brought to the masses through apps, automation and gamified UX. But in the vast majority of cases, these platforms were targeting people without lots of spare cash to invest: potential retail investors who make up 89% of the population but control just 2% of total wealth.

They became a digitally-native alternative to the self-service investment platforms that have been accessible online since the days of the dotcom boom, which themselves complemented the traditional role of independent financial advisers (IFAs) offering financial planning in tax, basic investing and estate planning to a mass market audience. Yet while the wrapper changed, the underlying products have not, nor has the market they serve. For all the hype, this version of WealthTech has not made many people wealthy.

At the opposite end of the market are the ultra-high net worth individuals (UHNWIs), who command assets in excess of $5m and often much more. These investors are typically looked after by wirehouses such as UBS and Morgan Stanley or private banks such as Coutts and Goldman Sachs, which provide no-expenses-spared services but are less assured when it comes to innovation.

In the middle are people who are coming into wealth and some of the challenges associated with it. Consider a couple in their early forties, entering peak earning years, with their children’s education costs climbing, and aspirations to buy a holiday home. Neither of the above solutions really caters for them: their needs are too complex for the self-service or robo-advice market, and their assets are too small for the traditional private banks. They do not want their parents’ financial adviser, but nor are they content to let automation take the wheel and entrust their fortunes to a faceless digital portal that acts without empathy.

So far, companies calling themselves WealthTechs have failed to transform the fortunes of any of these groups. No provider has yet combined the power of new technology with the old-fashioned virtues of wealth management — a reliable and efficient relationship-driven service supported by deep financial expertise. No-one has yet scaled up a recognisable tech company that serves customers who could legitimately be called wealthy.

We expect that to change because, simply put, the opportunity is too great to ignore. Since 2016, the number of people classed as HNWIs has risen by 38%, to a total of 22.8 million.These newly rich are guarding a goldmine of unmanaged assets, estimated at €22tn in Europe alone. And they represent a significant business opportunity for the wealth industry: if it continues to grow while maintaining current profit margins, it could realize an estimated $75bn in annual profit.

The new face of WealthTech

The rise of genuine WealthTech providers will bring the benefits of technology to the owners of meaningful assets — representing the next stage in the digitization of finance, while maintaining the human touch that these individuals need. Since the dot-com boom, technology in finance and investing has succeeded in bringing a legacy industry online and onto mobile, allowing people to engage directly with the stock market and clearing out the costs of intermediaries. That reached its apogee with Robinhood and the meme stocks — the point at which low cost, gamified UX and online communities combined not just to bring people into the market but to move it.

Technology has done a remarkable job in taking the cost and friction out of investing, but has left other parts of the wealth and financial management landscape relatively untouched. Now, we believe emerging technologies and rising customer needs are set to intersect. For every newly-minted high earner with financial needs that cannot be met by an index fund and a trading app, there is a potential client for a WealthTech provider that can marry the ease and low cost of a technology platform with the service and personalisation and empathy of a good financial advisor.

Such a provider will build a plan for each customer that reflects the finer details of their spending patterns, saving needs and long-term goals. It will work in real time, surfacing issues and opportunities as they arise, rather than waiting for the next quarterly report. And it will support a client with all their financial needs, from maximizing cash reserves to planning for retirement and accessing alternative assets.

For people who need something more than a model portfolio, something more modern than a financial adviser and something less expensive than a private bank, it will hit the sweet spot where affordability, technology and a human helping hand meet. This is what the robo advisers promised but never quite delivered: a solution that can provide digitally-delivered, highly-personalized, trustworthy and efficiently-priced advice to a wide base of customers. One that does not just appeal to younger users but to those around and above the age of 50, who remain by far the dominant holders of wealth. This is what we call WealthTech 2.0.

The beginnings of this wave of WealthTech have already started: startups like Ramify in France and Arta in the US, both founded in 2021, are pioneering new approaches in the wealth management landscape. Ramify combines advanced technology with human expertise to provide personalized investment solutions, while Arta leverages deep tech and high finance to make sophisticated wealth management accessible to clients outside of the ultra-wealthy and institutions. The challenge for any company in this space is that wealth management has always been a fragmented, localized market where scale has been difficult to achieve.

The land grab opportunity is for companies that can operate across borders to reach a tipping point where customer acquisition costs (which bedeviled the robo advisors) do not become prohibitive. That will require teams that can blend the mindset of a tech startup with the knowledge of a wealth manager.

Such a company might be consumer focused, but it will rely on outstanding tools and infrastructure to underpin seamless access to data, real-time functionality and the ability to harness AI. It will not be cobbled together with the software that exists in the market today. Which brings us to the other side of the revolution in WealthTech: the B2B opportunity.

A new stack for WealthTech

Like any other financial business, wealth management is a nameplate behind which sits a whole succession of unglamorous processes spanning trading, tax management, compliance, reporting, analysis and CRM.

For many legacy providers, the stark reality is that this value chain has become a hindrance: one in three wealth management executives say their companies still rely on ‘significant and intense’ manual work to perform basic tasks such as opening new accounts. Almost a third (29%) of wealth management professionals require three months or more to onboard ultra-high net worth (UHNW) clients, and only 13% can onboard a client within a week. Close to half of wealth managers (45%) think the technology they use is outdated.

Wealth managers in this space end up counting the cost of cumbersome processes and outdated tech: their relationship managers spend twice as much time on tasks such as administration, onboarding and compliance as they do on portfolio management and client engagement, and clients are noticing how slowly the wheels turn. Only 47% of HNWIs said they were happy with how they were onboarded by their wealth manager, just a quarter would recommend their firm to a friend, and almost a third were planning to switch provider within a year.

The current tech stack is failing both providers and customers — and ill-equipped to support the kind of nimble, data-driven and AI-powered service that will be the backbone of WealthTech 2.0. It is a large industry dominated by multi-billion-dollar companies like Aladdin (Blackrock), SimCorp, SS&C Technologies, and State Street with a combined market cap of $76bn.

SimCorp, which dates back to the 1970s, and SS&C, made up of dozens of different companies acquired over several decades, represent the unsatisfactory status quo of B2B services in wealth management. It is a status quo stitched together from numerous different parts, many of which were founded in the 1980s or 1990s and built for a pre-digital market with much lower trading volumes and fewer customer expectations. Innovation will always be stifled when newcomers to the market must rely on such legacy providers.

To achieve its potential, WealthTech needs a new tech stack: one that underpins seamless personalized experiences for customers, generates real-time insights, leverages data at scale, and embeds AI across workflows. Customers need an experience where they are waiting minutes rather than weeks for things to happen; financial advisers should be freed up to commit the vast majority of their time to meeting client needs; and providers should be letting automation take care of administration so they can focus on value-added services.

This is the second opportunity brought about by the new wave of WealthTech: the space for B2B providers to attack the problem of outdated software and cumbersome processes, while building the platform for those who want to deliver a data-enabled and AI-powered wealth management experience. If Europe’s HWNIs are sitting on a goldmine of unmanaged assets, then here is the chance to sell picks and shovels. While B2C providers have their eye on the shiny stuff at the surface, their B2B counterparts are the ones who will build the infrastructure and install the equipment that enables them to excavate deep underground.

The opportunity is now

Wealth management is on the cusp of a transformation, driven by a perfect storm of technological advances, rising customer expectations, and untapped growth potential. Several key trends are converging to create a unique moment of opportunity:

• AI and automation: The ability to automate repetitive tasks means wealth managers can now focus more on client needs and less on paperwork. This is a major breakthrough in an industry that has historically relied heavily on human-driven processes.
• Consolidation of software: Acquisitions such as Deutsche Börse’s $4.3bn acquisition of SimCorp signal that the old guard of wealth management software is being shaken up.
• Banks and alternative asset managers are rushing into wealth: UBS’s acquisition of Credit Suisse (2022) and JPMorgan’s acquisition of First Republic (2023) highlight the urgency among traditional financial institutions to tap into the wealth management space. The total market capitalization of global banks is approximately $8tn, and capturing the wealth market could add about one-seventh to their overall value. Similarly, large private asset managers like EQT entering the private wealth space with new fund products adds both significant competitive pressure and growth potential to the industry.
• Outdated tech stack: The technology used by many wealth management firms was built for a market that existed 30 years ago. Daily outages and crashes are common, especially during US market openings. For example, managers struggle with legacy systems like Axioma and Barra, which have become bottlenecks for real-time decision-making. Moreover, 75% of SimCorp’s customer base still operates on-premise.
• Fee compression: The industry has witnessed significant compression in management fees, with basis points dropping from 1% in 2000 to just 0.75% in 2020. As capital markets become increasingly competitive, customers are looking for cheaper, more efficient processes and software solutions to manage their wealth.
• Wealth growth and transfer: Global wealth continues to expand, with assets under management (AUM) growing at 8% annually. In addition, over the next decade, trillions of dollars will shift hands as wealth is passed from the baby boomer generation to millennials. A survey of 544 managers predicts that two-thirds of heirs will fire their parents’ investment advisor after receiving their inheritance.
• Liquidity and risk management: The SVB crash and ‘22-’23 bear markets have shown the fragility of outdated risk and liquidity measures, underscoring the need for better technology to manage risk and compliance in real-time.

With these forces in play, the wealth management industry is positioned for its long-awaited leap forward. The technology to make this shift possible is now available, and the demand from both HNW and UHNW clients is undeniable. WealthTech 2.0, backed by automation, personalization, and real-time data, has the potential to overhaul legacy practices and finally deliver on the promise of democratized, trustworthy and tech-enabled wealth management services that are still, at least in part, delivered by a real person.

As with all emerging trends, WealthTech 2.0 contains as many questions as certainties. Will a single player strike gold on both the B2C and B2B fronts, or will it be a case of many pioneers joining forces? Will the new wealth providers stick to the traditional AUM model of pricing, or will they favor something closer to a subscription model? Can a company overcome the longstanding challenge of scale and different regulatory environments to operate Europe-wide, and how?

What is for certain is that a new wave of WealthTech is arriving. The opportunity at both ends of the market is clear, both for the startups that have already begun to emerge and for the big banks that see a market which can add around a seventh of their current market capitalisation in value. The customer base is growing, the available technology is improving, and there is significant scope to consolidate and overhaul what remains a fragmented, highly manual industry to which change has been slow in coming.

That is what gives us confidence that innovation will have a dramatic impact in the coming years, and legacy practices will finally be on the chopping block. After years of discussion about the potential of WealthTech, it feels like change is finally arriving. The real gold rush is beginning.

We would love to hear from people building in this space. We are here to support, partner or just to chat. If what you’ve read resonates with you, reach out to fintech@eqtventures.com.