Rethinking Wealth Management with Software
For a traditional bank, a mass-market customer is worth $400–500 per year in revenue. An SME customer will typically generate two or three times that amount. But a high net worth individual (HNWI) or a private banking customer can be worth further multiples of this.
In 2022, globally these 22.5m HNWIs generated $400bn of revenue, most of which went to incumbents.
Outside of roboadvisors like Betterment and Wealthfront, the sector has been one of the more resistant to disruption. Received wisdom has been that wealth management is a complex, relationship-driven business and, for challengers, acquisition costs are too high to make sense. However, this logic no longer holds.
The trends
How has the landscape changed? First, HNWIs look very different from 20 years ago. The tech industry has created a new generation of customers. Largely entrepreneurs, they attribute little value to the high cost, ‘white glove’ service model of incumbents and demand much more than the legacy tech these businesses offer.
Second, the ‘great wealth transfer’ is underway. By 2045, $72tn of wealth will be passed from Baby Boomers and the older members of Gen X to Millennials. Those inheriting this wealth are digital natives, information-rich and comfortable using Youtube for education and product discovery. They’re also activists, demanding impact not just returns from their investments.
Third, demand is growing for alternative asset classes, from cryptocurrency and collectibles to climate-first products, private equity, venture funds and fractionalised real estate. Traditional wealth managers have neither the technology nor the brand to meet these needs.
The fourth trend comes from generative AI. The concept of “automated advice” is not new — Betterment launched over 20 years ago and roboadvisors now manage more than $2tn of assets. However, whilst first gen advice was limited to simple portfolio selection, generative AI has the potential to address far more complex wealth needs, offering a virtual equivalent of the true ‘white glove’ advisor.
Finally, tokenized assets should not be overlooked. NFTs may have been a false start for many but there is significant potential for dividing, trading and storing financial assets on the blockchain. Much of the initial hype was around real estate and art but we’re now seeing major moves from the likes of Goldman Sachs with its Digital Asset Platform and Hong Kong’s first tokenized green bond.
The opportunity
The startups exploiting these trends are following a pattern of attack similar to other sectors: initial disruption at the periphery with clearly defined wedges before going for the core. We’ve been tracking four main themes:
1. Portfolio and wealth tracking tools. Enabled by open banking and APIs, apps like Finary and Vyzer have emerged, allowing individuals to track their increasingly diverse portfolios across all asset classes, from brokerage, crypto and wealth management to real estate. These platforms will be obvious beneficiaries of generative AI.
2. Full stack, alternative platforms. Startups like Moonfare have led the way by providing access to private equity funds. Allocate is following a similar path with venture capital. Louve is opening up real estate funds. In Europe, incoming ELTIF regulation, which allows non-accredited retail investors to access alternative asset classes, will accelerate this trend.
3. ‘Vertical’ private banks. These companies look to provide a full wealth service to a distinct customer segment. For example, A16z-backed The Coterie promises a wealth service “designed by founders for founders”. Compound offers a “personal CFO” for tech founders and employees.
4. The digital family office. At the highest end of the wealth spectrum sits the family office. Typically ultra-high net worths with highly complex financial needs from FX risk and liquidity forecasting to multi-jurisdictional tax exposure. In the same way the office of the CFO in companies is being transformed, this bastion of manual activity and high fees is ripe for disruption.
As the opportunities become clear, a key question is how the challengers’ economic models will evolve. Historically there have been two main models: the incumbent model with high fees, expensively produced and largely proprietary products; and the robo-advisor model with low fees, vanilla products and high volumes. Both, however, are dependent on fee structures sitting on top of assets under management (AuM).
The most interesting opportunity is this new wave of startups is to build their business with software rather than AuM economics at the core. This implies a value equation where a digital experience plus the underlying wealth created by software is not just better but significantly better than today’s human-centric options. Imagine the margins if software can replace humans whilst retaining comparable fee levels?
Consumer banking has had its Revolut and Monzo moments, SME banking has had its Tide and Qonto moments. Wealth management is next in line.
We’ve been fortunate to back some great founders building in the savings and investment space, for example, Raisin and Louve. With EquityBee we’re excited to see alternative options for accessing liquidity for start-up employees.
If you’re a founder also looking to take on this highly profitable $400bn incumbent market, we’d love to hear from you.
