New tensions are simmering in the wealth management sector. An industry long dominated by globally-active financial titans such as Merrill Lynch and JP Morgan Chase, the investing sphere isn’t one that most people would pick as a candidate for tech disruption -- and yet, the sudden rise of all-digital financial solutions suggests that it is.
In recent years, fintech startups such as Wealthfront and Acorns have made quick work of establishing themselves as alternatives to traditional (and notoriously expensive) wealth management services. Wealthfront, in particular, has thrived; since its founding in 2008, the company now manages roughly £3.56 billion for over 100,000 users. These robo-investment startups offer automated financial advising services through an entirely digital platform.
Their services are one-size-fits-all; when a client signs up, robo-advisors use algorithms and big data to decide where their assets should be allocated. Fintech companies like those mentioned above also allow Millennials to invest by making the minimum contribution threshold more attainable. They allow for investments of only a few hundred or thousand pounds and don’t charge the 2-3% fee that in-person advisors would.
Here, we come to the tension. As Millennials increasingly gravitate towards new, digital-centred solutions for the financial needs, those in the industry have begun wondering if fintech startups will ultimately supplant industry giants and render the in-person advisor obsolete.
Millennials want to be financially responsible; according to a 2016 study from Bankrate, nearly two-thirds of those surveyed put over 5% of their income into savings. Investing, however, can pose a challenge. Traditional financial advisors can be cost-prohibitive for early-career Millennials, given that many wealth managers have minimum investment thresholds around £100,000. In the past, financial titans have been comfortable in the knowledge that their clients will eventually accumulate enough money to come asking for services -- but now, fintech startups are offering more accessibility earlier.
As Matt Harris, a managing director at Bain Capital Ventures and an early investor in Acorns through the company, put the matter for the Wall Street Journal, “The industry’s case is: ‘Oh yeah, when [millennials] grow up and have money they’ll come running [to industry giants], ’ but I don’t think that’s a safe bet -- not even remotely.”
These wealth managers expect that Millennials will follow the pattern set by past generations -- but fintech startups don’t appear to be willing to wait that long, or give up the clients they’ve accumulated so far.
Some fintech companies are working to keep their competitive edge by proactively diversifying their product offerings. Acorns, for example, rose to prominence by targeting Millennials who might not have the funds to make larger investments invest their spare change into exchange-traded funds. Now, the company has rolled out offerings that focus on ageing millennials and encourage longer-term usage, including Acorns Later, an individual retirement account product. Some reports also suggest that the company is pursuing Millennial-favoured impact-investment products as another way to interest users. One point is clear -- companies like Acorn are doing all that they can to keep Millennials interested in their services, rather than those provided by traditional investors.
To their credit, many of the old guard have taken steps into the digital landscape. Vanguard, Merrill Lynch, and Morgan Stanley have all launched robo advisors, although they still predominantly centre on investors who already have a few thousand pounds to invest. They also charge more in fees than most of the startups mentioned, arguing that their hybridised menu of robo- and in-person-services are well-worth the cost.
Naureen Hassan, the chief digital officer at Morgan Stanley Wealth Management, made her case in a news report on the subject. “As people age, their lives get more complex—there are trust and tax and estate issues, mortgages and inheritance. That’s where we see people wanting the help of a financial adviser to help them talk through decisions and make decisions in a collaborative way.”
In other words, the old guard is attempting to create digital offerings that can both capture digital-savvy Millennials’ attention and meet their needs as they and their investment portfolios develop.
The question remains, however, as to whether these measures are too little or too late. While tech disruption has so far been contained to the younger or lower-value investors and not impacted traditional advisors’ older client base, the two may not be able to coexist so easily in the future. If fintech startups can expand their product offerings to keep pace with developing Millennial needs, they may be able to match or even disrupt traditional investors’ hold over the wealth management sector.
For now, there’s little to do but watch and wait to see if innovation will ultimately propel these small startups ahead of industry titans.