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The year 2017 was the most pivotal year for wealth management – technology startups shot themselves in the foot, empowering the next wave of transformation in one of the most asset-heavy segments. Taking their time to watch, interact, and learn, financial institutions have evolved beyond recognition in their strategies. A number of entities have demonstrated the ability to compete with bold technology startups both in terms of adoption of advanced technologies, and costs to the business and consumer. BBVA (& FutureAdvisor), Wells Fargo (& SigFig), Barclays,Fidelity, Capital One, Deutsche Bank, Morgan Stanley, U.S. Bancorp (& FutureAdvisor), TD Bank, TIAA, UBS, Merrill Lynch, ATB, China Merchants Bank (CMB), Goldman Sachs, RBC & FutureAdvisor, BNP Paribas, Standard Chartered,E*TRADE, China Everbright Group, RBS, and ICBC are just some of the most recent examples of institutional response to the rise of WealthTech.
While certainly opportunistic, wealth management is a segment with high barriers to entry, in addition to being highly disproportionate in terms of AUM distribution. Vanguard Personal Advisor Services had $93 billion AUM as of September 2017 – a 12% growth from October 2016. For comparison, Betterment had ‘only’ $10 billion AUM as of July 2017, Wealthfront had $7 billion AUM as of August 2017, and Personal Capital had $5 billion AUM as of August 2017 (gained $2 billion AUM in 2016 alone).
The above-mentioned hallmarks served an advantage for institutional players to build proprietary solutions to challenge the hype surrounding startups (with the sheer economics always remaining on the institutional side). Lower account minimums, lower fees, rock-bottom commissions, target audience expansion, automated rebalancing, and, in general, a bet on advanced technology + an expert in wealth management, are the new normal.
While non-institutional players will likely fall victim to overcrowding and consolidation of resources through partnerships and acquisitions, startups changed the face of wealth management in the long term. Robo-advisors powered by technology will diminish the barriers to market entry to a range of whole new types of players.
“Both financial and non-financial services firms can take advantage, bringing new levels of competition and innovation to the industry. For instance, we will likely see more asset management and insurance firms adding wealth advice to their distribution and effectively entering wealth management; non-financial service firms with access to large numbers of retail investors and leading-edge technology firms will likely also enter wealth management through a robo-advice model,” experts from Deloitte emphasize.
What did FinTech bring into wealth management exactly? The short answer is AI. Thompson Reuters suggests that cognitive software platforms, which provide the tools to analyze, organize, access, and provide advisory services based on a range of structured and unstructured data, are set to attract investment of nearly $2.5 billion in this year alone.
Outlining the ways that AI is supercharging the wealth management industry, Thompson Reuters emphasizes the following:
- Expanding advisory capabilities beyond human capacity following the data explosion (more data will be created in 2017 than in the last 5,000 years. And it’s expected to increase three times from this year until 2021);
“With AI you can scan the available market data and understand events and triggers that change the market situation and potential performance of certain sectors, certain stocks. It’s all about the ability to process a huge amount of data, define the rules and drive the right rules,” said Oliver Bussmann.
- Augmented intelligence platforms;
- Goals-based wealth management;
- Expert virtual advisor deployed as an API plug-in.
“Intelligent applications based on cognitive computing, artificial intelligence, and deep learning are the next wave of technology transforming how consumers and enterprises work, learn, and play,” said David Schubmehl, Research Director, Cognitive Systems and Content Analytics at IDC.
“These applications are being developed and implemented on cognitive/AI software platforms that offer the tools and capabilities to provide predictions, recommendations, and intelligent assistance through the use of cognitive systems, machine learning, and artificial intelligence. Cognitive/AI systems are quickly becoming a key part of IT infrastructure and all enterprises need to understand and plan for the adoption and use of these technologies in their organizations,” Schubmehl suggests.
The International Data Corporation (IDC) forecasts that worldwide revenues for cognitive and AI systems will reach $12.5 billion in 2017, an increase of 59.3% over 2016. Global spending on cognitive and AI solutions will continue to see significant corporate investment over the next several years, achieving a CAGR of 54.4% through 2020 when revenues will be more than $46 billion.
The investment industry is now shaped by the trend called ‘Watsonization,’ which refers to cognitive computing systems that can interpret massive quantities of data, learn as they go, and will hold an information advantage over today’s analysts. They will also give investment firms powerful new tools for interacting with investors, assessing risk, enhancing cybersecurity and more.
Cost-efficient robo-advisors that will use sophisticated algorithms to made decisions about funds allocation will make a big wave in the industry and grow the total value of AUM of robo-advisors worldwide to $8.1 trillion in 2020.