Wealthtech is coming to the High Street
For those in employed in financial services, technology has always been important – integrated systems for operations and execution have been with us for decades. But to the banking customer at a High Street branch the advances in technology may not be obvious. However, slowly and surely innovations from the fintech sector are filtering down to the mass-market.
One area of fintech that is of interest is wealthtech. This sub-sector is likely to become more visible over the next few months. Wealthtech has become defined as utilising technology to enhance wealth management and the retail investment process.
The most visible players in the UK are the robo-advisors with Nutmeg the best known (and RiskSave following behind!) but other concepts are also deserving of attention, such as Munnypot. Technology derived from wealth management firms, research tools that generate investment solutions, and platforms to support financial advisors – all fall under wealthtech.
These developments will soon be more visible at branch level. An upcoming large and obvious evolution will be the inclusion of financial advice to the product offering of the domestic banks. In 2018, the vast majority of financial service firms with a physical presence will offer automated financial advice. This is from a standing start a year ago. This service has become known as robo-advice and for the large banks will act as a conduit for their asset management arm, as well as (they hope) a new and valuable revenue stream. They are also hoping for tertiary benefits as new and interesting products act as a way of encouraging customer stickiness and increasing user engagement.
This development has certainly been encouraged by the UK regulator, Financial Conduct Authority (FCA), which has invested £500,000/yr on a robo-advice advice unit. The FCA’s desire is that robo-advice or wealthtech could finally enable the provision of advice to mass-market segments, including those that have previously been unreached by financial advice. The regulator estimates this could be as many as 16 million people in the UK alone.
An offering of automated financial advice from the retail banks could go a long way towards alleviating this. Santander and HSBC have already launched product offerings in this space, RBS is trialling a service through its Coutts’ sub-brand and Lloyds (with a quarter of the UK market) are sitting on the sidelines awaiting the results of the regulator’s Financial Advice Market Review (FAMR).
But with the distribution potentially available it’s likely wealth management is about to enter a period of change. The smaller wealth managers and banks are looking at the space. Investec, which traditionally serve the more affluent end of the market, has launched a robo-advice offering “Investec Click and Invest” aimed at millennials and those who can’t afford full financial advice. Similarly, UBS has launches its SmartWealth digital platform in the UK.
The technology originates in the US with Wealthfront. The company was founded in 2008 and is considered to be the first to develop the robo-advice concept. Wealthfront has since been followed by a number of entrepreneurial start-ups and replicators around the world. Hundreds of thousands of investors worldwide have embraced these platforms, and the enthusiasm of users contrasts markedly with that of legacy wealth management providers. Nutmeg has a score of 9/10 from TrustPilot the customer review platform. More traditional wealth managers consistently score lower and many much lower.
Consultants and investors estimate that within the next five years those who have been “robo-advised” will climb from an estimated 50,000 now into the millions. It is likely that existing financial service firms will pick up the bulk of custom. This is important as it means that those involved in retail bank technology or operations will have to consider the impact of this on their processes.
Integrating a wealthtech solution will depend on the provider and other factors, but most solutions will offer modular processes and financial services firms will develop many of the features in-house. Indeed, established players like the aforementioned Investec, Charles Schwab and Vanguard all developed platforms internally.
Other players have used acquisition, examples include Invesco acquiring Jemstep and Blackrock acquiring FutureAdvisor. The most practical answer for many players will be to buy modular processes from specialist vendors. Examples include InvestCloud, which has developed white-label solutions for multiple wealth managers, and RiskSave that specialises in the investment and regulatory process.
The relevant modules for a bank or building society looking to create robo-advisory are often listed with slightly different names or in slightly different ways, but a broad consensus is forming that the product should be split into:
- Client onboarding – particularly important when regulations put so much emphasis on anti-money laundering (AML) and combatting terrorist financing.
- Suitability – the product must be suitable, as the FCA defines it, for the client and the technology must ensure that this is the case.
- Investment process – likely to be more important as the industry matures and user experience (UX) becomes commoditised. Most solutions utilise Modern Portfolio Theory but other solutions utilising Liability Driven Investment are coming to market.
- UX – the front-end and digital engagement module. This must be FCA-compliant and refer back to other modules. But as the “shop window” should be used to increase client acquisition and retention by ensuring a smooth customer journey.
By identifying the pieces of the robo-advice solution, integration of the technology could potentially be smooth, issues are likely to lie within application of existing systems and on the horizon. A further issue is the General Data Protection Regulation (GDPR) which comes into force in 2018 and will change the way financial services firms obtain and process data – smaller legacy institutions may find the burden of implementing this directive affects their ability to embrace wealthtech.
We expect to see more than a 100 solutions to develop in the UK in the next few years. This will aid uptake. Importantly, firms such as Lloyds, Santander and HBSC already have millions of customer relationships, and they are about to enter the market.
And even more importantly, their distribution network includes many of the segments of society that have never benefitted from financial advice. There is a real chance here that technology will benefit financial inclusion. and with low interest rates and an aging population creating a desire for saving and investment products it is likely that financial advice will be more readily available in the near future to millions previously excluded from the most appropriate financial products.
By Dan Tammas-Hastings, founder and MD, RiskSave