The $84T Gorilla in the Room: What is the Future of Wealth?

Illuminate Financial’s model, supported by the strategic relationships forged across global banks and financial services institutions, is what makes diving into Wealth and Asset Management Tech so pertinent. We are excited to be revisiting this space as this theme fits squarely in our remit and is filled with opportunities to reimagine how investors and advisors build and manage wealth moving forward.

TLDR: The century-old wealth and asset management industry is ripe for innovation. The investor demands a digitally enabled, personalized, and holistic financial experience and technology is now equipped to meet and exceed expectations. We foresee an exciting 5–10-year period of revamping the financial advisor’s tech stack to enable a seamless experience for the investor.

We believe the billion-dollar wealthtech opportunity is in the B2B space. Overhauling the advisor stack is inevitable for investors to receive the exemplary experience they have become accustomed in other facets of life. There are several drivers behind why now is the time:

(1) The $84T Great Wealth Transfer is underway

(2) Recent technological development can meet both regulatory and investor requirements

(3) The emergence of the mass affluent as a target segment

Past, Present, and Future: Wealth of yesterday — investment management; Wealth of tomorrow — holistic financial coaching

We believe change is here. This is apparent through conversations with founders, wirehouses, and wealth advisors. Wealth is a topic that is gaining momentum and everyone — from venture capitalists to large financial institutions — is eager to understand how tech can propel this legacy industry forward.

Wealthtech had a moment in the 2010s. Significant investment went into funding and scaling companies, particularly on the consumer side. Big bets were made that the robo-advisor was the future of wealth, completely removing the advisor from the equation. Companies like Betterment, Wealthfront, and FutureAdvisor (acquired by BlackRock) rose to the occasion and capitalized on the opportunity. However, building brand recognition and trust was more expensive than expected, leading to high customer acquisition costs and razor thin margins.

Furthermore, incumbents, such as Vanguard and Schwab, were quickly able to swoop in and launch robo-advisor platforms to take the top spots in the market as they already had the customer relationships. Yet, the robo-advisors are not a dominant part of the incumbent’s business, conveying the importance of the advisor role. For example, Vanguard has the #1 spot in AUM of robo-advisors at $206B, which only comprises 3% of its total AUM of $8T. Robo-advisors are unable to provide trusted guidance, affirmation, and open dialogue to assure investors of their financial plans and strategies and create peace of mind. According to Vanguard research, trust and personal connection account for 40% of the investors’ perceived the value of financial advice. This depicts that tech will not replace the advisor but rather enable a more personal and elevated investor experience.

We unpacked this topic several years back in Reimagining the Wealth Management Stack and Hyper-personalization and the implications for wealth management. The themes highlighted in these pieces continue to ring true today — the underlying technologies that power wealth and asset management are not designed with the flexibility, ease, and sophistication required to evolve with the job. We knew this back then and we know it now, but we believe now the tipping point is inevitable.

The definition of wealth management has fundamentally changed. Traditional wealth management involved working with an advisor to determine investment strategies for wealth creation and preservation. Wealth management of the future integrates advanced digital technology, comprehensive data, and a wider array of products and services to optimize wealth creation and preservation. The advisor’s role is shifting from that of an investment manager to a holistic financial coach, directing and guiding all aspects of financial decision making. See Table 1 below outlining key characteristics of each state.

Table 1: Traditional wealth management vs. wealth management of the future

At the moment, we are somewhere in the middle between these two states. At the consumer level, the mass affluent have more opportunity than ever before to invest through digital investment tools, such as Robinhood and Acorns. For managers, technology has evolved relative to the administrative paper processes of the past but not to the caliber of experience we as consumers expect. Significant transformations have taken place across our shopping, social interaction, transportation, and education experiences, all of which are now seamlessly accessible through our phones and computers. Banking has also evolved to offer a highly digital, accessible, and real-time experience that was unimaginable just a few years ago. This glaring gap depicts the major challenge afoot to keep up with the times for the wirehouses, broker-dealers, and RIAs.

The problem? A misalignment of expectations and reality between investors and advisors

The core problem across wealth management boils down to one stark truth: there is a complete misalignment of expectations and reality between investors and advisors.

For investors, this manifests in several ways:

• Unmet Expectations: Chart 1 depicts the overwhelming gap between the services expected and the services received from the point of view of the investor. The average investor presumes planning services, such as tax and estate planning, will be provided through their financial advisor. This chart proves that it is quite rare these services are received. Investors also expect exposure to diverse investment products through their advisor, including alternatives. These have historically been reserved for the UHNW (and some HNW) due to high minimums and liquidity constraints, leaving investors without access to achieve these higher returns.
• Subpar Digital Experience: Many investors are dissatisfied with the digital tools available, with 49% selecting firms based on digital experiences and 44% citing frustration with the inability to view all their investments in one location.
• Lack of personalization: Advice based on bucketed risk profiles fails to address individual financial goals, life stages, and preferences, leading investors to question the value of the services received.

Chart 1: The Gap — Services Expected vs. Services Received

For advisors, the barriers to meeting investor expectations include:

• Technological Lag: Advisors struggle to keep up with the evolving customer demands due to outdated tech systems that hamper efficiency and responsiveness. The underlying technology infrastructure that fuels the ecosystem is rigid and does not integrate throughout the value chain. This creates a cumbersome environment for advisors and investors to explore and use effectively.
• Regulatory Compliance: Navigating the complex regulatory environment is time-consuming and resource intensive. This includes KYC, AML, and various reporting obligations, all of which divert time away from client-facing interaction.
• Generational Shifts: Advisors have been working with most of their clients for decades. As spouses and heirs come into the picture, the offering falls short. Incredulously, over 70% of heirs or spouses will fire or change financial advisors after receiving the inheritance. This stat alone depicts how innovation in both the technology and the advisor role itself is essential for the survival of the wealth management industry.

Why now?

What is so different between now and 5–10 years ago when it comes to wealthtech? Why is the industry finally waking up and embracing technological innovation? We think the impetus for change is due to several key reasons.

1 | The Great Wealth Transfer is underway

The dominos of the $84T Great Wealth Transfer (“GWT”) have finally begun to fall. Chart 2 displays how the wealth transferred will be split across the various generations over the next two decades. In the U.S., 90% of parents intend to leave behind an inheritance to their children, but 48% do not have a specific plan in place. This signals the massive opportunity that wealth advisors have ahead of them to partner in enabling this transition.

Chart 2: Estimated wealth to be transferred through 2045, by generation:

There is another important element to the GWT that doesn’t get enough attention. Not only are the assets changing hands for the investors (from the silent generation and baby boomers to Gen X, Millennials, and Gen Z), but they are for the advisors as well. The average age of a financial advisor is 51 and 40% of financial advisors are expected to retire in the next 10 years. Due to this, there has been, and is expected to continue to be, consolidation of the Independent RIAs in the industry as advisors look for their exit prior to their retirement. More than $3.7T in client assets are estimated to be available for acquisition over the next 5 years. Private equity firms are actively purchasing Independent RIAs due to the fee-based recurring revenue, client stickiness, growth potential, and market fragmentation. This consolidation facilitates scaling technologies across the market, as each customer generates more revenue and fewer customers are needed to achieve traction.

2 | Recent technological developments are sophisticated enough to meet both complex regulatory and personalization requirements

Leveraging advanced technologies, such as AI and machine learning, can automate compliance tasks, ensuring advisors adhere to regulations while reducing risk of human error. We can quickly analyze large data sets, detect regulatory breaches, and generate high-quality and real-time regulatory approved reports. Furthermore, AI and machine learning can analyze individual client data to offer tailored investment strategies and plans. This will enable the industry to move beyond the bucketing of investors into a generic risk profile and rather create highly personalized experiences based on all relevant data points.

3 | The emergence of the mass affluent as a target segment

The mass affluent, which has between $100,000 to $1M in investable assets, represents 40% of wealth assets. This is a historically undeserved segment — with only 1/3 wealth firms offering services to this group — because the margins have not been justified. It is believed that this group has the most growth potential and all players are vying for their attention. Designing an efficient and streamlined digital-first experience is key to minimize operating costs and make the economics work.

Opportunities:

Through our conversations and research, we have identified three key areas of opportunity across the wealth landscape, which are as follows:

- Wealth infrastructure of the future: Secure, cloud-based technology will enable wealth management firms to efficiently and flexibly scale their operations. APIs are essential and facilitate interoperability and seamless integration between financial systems and third-party applications, connecting the entire financial ecosystem. This will give both investors and advisors the ability to see and trust all financial, and relevant non-financial, information so they can plan and action accordingly.

- Advanced and differentiated planning capabilities: Advisors will need to provide advanced services, such as tax planning, estate planning, and retirement planning to meet the needs of the customers. Investing in high-quality advanced planning capabilities will enable the advisor to become the center of their investors’ financial experience and to guide them effectively throughout their journey.

- Increased access to alternatives: Alternatives have primarily been accessible to institutional investors and UHNW individuals due to high minimum requirements. Recent technological advancements in areas such as tokenization, regtech, and AI are lowering the barriers to entry, enhancing transparency and security, and providing tools for investment analysis. 80% of HNW investors ages 21 to 42 are turning to alternative investments and allocating three times more to alternative assets than prior generations.

The wealth management industry is on the brink of a technological revolution driven by some massive tailwinds. As we delve deeper into this evolving landscape, we are excited about the opportunities that lie ahead. Stay tuned for our next post, where we will continue to unpack the market and the technological infrastructure changes underway!

If you are a founder building or a like-minded investor thinking about opportunities in the wealth and asset management space, we at Illuminate would love to chat with you. Feel free to reach out to me at lc@illuminatefinancial.com and my colleague, Charlton, ch@illuminatefinancial.com to continue the conversation.