All about Wealthtech: Past, present, and future

Let’s talk about Wealthtech. If the last fifteen years or so have been characterized by an intensive drive to digitalize almost all aspects of our economy, it’s fair to say that wealth management has been something of a laggard in that respect. A conservative industry based on trust and close relationships, it’s understandable why wealth management could be wary of the atomized, impersonal nature of digital relationships.

However, we have come to see that those fears are mostly unfounded and a wide range of companies, called Wealthtechs, have shown how digital solutions can supplement (or even replace aspects of) the delivery of wealth management services.

But as Wealthtech is a new industry, and one easily confused with its better-known cousin, Fintech, we want to take the opportunity to provide an in-depth explainer about what Wealthtech is, what problems it solves, its history, and its future.

What is Wealthtech?

First, let’s define what Wealthtech actually is, as there is some conflicting information out there on the subject.

Definition of Wealthtech 

Wealthtech is a subset of Fintech, which is the delivery of a broad range of financial services through digital means. Within that, Wealthtech is focused on delivering wealth management services digitally. 

The question is: What has digital enabled in the wealth management space that wasn’t possible previously? 

Broadly speaking, solutions fall into two categories: solutions that expand the availability of wealth management services to wider social groups; and solutions that leverage digital to deliver traditional wealth management services more effectively. 

Perhaps it would be helpful to look at the difference between eToro and Betterment and why one can be considered Fintech and the other is Wealthtech. eToro is an investment platform that lets customers buy and sell a wide range of assets. It allows them to get hands-on with their investment portfolios and become individual active investors. We would argue this remains Fintech, despite its services being used to build one’s wealth. 

On the other hand, while Betterment also allows its customers to invest in the stock market, it requires them to consider their long-term financial goals, risk appetite, and investment horizons. It does not allow its customers to trade individual equities (or other asset types), deploying algorithms to invest instead in passive funds. It treats its customers like private wealth clients. Therefore, we can consider Betterment a Wealthtech company. 

Both the above groups target the customer not the service provider, but Wealthtech solutions also exist that improve the lives of the wealth managers themselves, either allowing them to serve more clients or serve existing clients more effectively—or both. The term for Wealthtech solutions for wealth managers is “Advicetech”, although this term is not as established. 

Click here for a deeper look into the differences between Wealthtech and Fintech. 

Wealthtech Solutions 

Wealthtech companies comprise, by our count, seven distinct verticals.

Robo-Advisors 

Robo-advisory platforms provide algorithmically generated investing and financial planning services. New clients will complete a questionnaire that assesses their risk profile, ESG (environmental, social, and governance) views, time horizon, financial goals, and other key criteria, forming an investment basis. The platform will then invest typically in passive investment funds. 

Robo advisors can deliver services at scale, allowing them to charge lower fees. Clients can also open accounts with a smaller investment pool and can access the service at any time. On the downside, they have fewer investment options available. 

Robo advisors make up the fee deficit through processing larger volume of transactions, thanks to their larger client base. 

We’ve dug further into this topic in our blog, ‘How Wealthtech is democratizing investing’. 

Robo Retirement 

Some firms offer algorithmically generated retirement planning. The general approach is similar to the robo-investment platforms, just with a tweaked end goal. 

Micro Investing 

For people who struggle to set aside a monthly sum for investing, micro investing allows customers to round up their daily purchases to the nearest primary unit of currency (dollar, euro, pound sterling etc) and invest the margin in their portfolio. This allows the customer to slowly build up their investment pot without having to adjust their behavior or spending. 

This model is possible with zero investment fees and the advent of fractional shares. Fractional shares are a portion of a share that’s less than one whole share. 

Digital Brokers 

Digital Brokers automate services provided by traditional brokers in verticals such as insurance and mortgages. Robo advisors can also be considered digital investment brokerages.   

Account Aggregators 

Made possible by Open Banking regulation introduced in the 2010s, account aggregators use APIs to bring together an individual or household’s financial accounts (savings, current, and investment) in one place. 

Private Banking Solutions 

The ultra-rich have different, or extended, needs in terms of managing their wealth than the layman. Companies such as Topaz bring together a raft of existing technologies to offer end-to-end private wealth solutions that make wealth management easier for both clients and advisors alike. 

In the tug-of-war between automated and traditional (in-person) wealth management, a third way, hybrid advice, is winning. Hybrid advice empowers clients to handle certain tasks themselves while retaining the ability to talk to their personal financial advisor, building and maintaining the key element of private banking—trust. And for the advisor, such solutions automate laborious processes so they can focus on their biggest value-add—building relationships with clients. 

Advicetech 

Advicetech companies provide software solutions that help wealth management firms improve the efficiency and cost-effectiveness of their operations. While the term was coined relatively recently, Advicetech is perhaps the oldest type of Wealthtech, with financial planning and stock-picking software first appearing in 1998.

Find out which six Wealthtech companies we think are delivering outstanding UX.

History of Wealthtech

Now, let’s take a look at the big picture: how Wealthtech began, what its adolescent growth phase looked like, and what’s happening in the industry in the early-mid 2020s as the industry matures.

Stage 1: Origin of Wealthtech 

Before Wealthtech really started in around 2008, proto-Wealthtech companies and services existed before then. Financial Engines, now known as Edelman Financial Engines, began providing retirement planning and fund-picking software in 1998 for instance; while software that supports wealth managers has also been around since the ‘90s. 

Stage 2: Growth of Wealthtech 

The release of Betterment’s platform in 2008 can be considered to mark the initiation of the Wealthtech movement. Betterment was perhaps the first robo-advice platform and, as of 2022, is the largest globally. Wealthfront went live in 2008 as well. Betterment’s release coincided roughly with the 2007 Financial Crisis. Some commentators have drawn a link between the two, arguing that people looked to new ways to control and stabilize their financial situation in a turbulent time.  

No doubt that’s part of the equation. A more likely factor, however, was the coalescence of new consumer tech becoming available, namely the original iPhone in 2007, and the tech industry becoming a distinct entity. Together, businesses had new challenges to solve and new channels through which to deliver their solutions. With sophisticated software and hardware in consumers’ pockets for the first time, app-delivered services became viable.  

Not too dissimilar to Betterment, Nutmeg, a London-based robo-advisor, arrived in 2011. Other robo-advisors that sprung up in the following years included Scalable Capital (Germany), Wealthsimple (Canada), Stockport (Australia), Moneyfarm (Italy), TrueWealth (Switzerland), and 8 Securities (Asia-Pacific). There are an estimated 100 robo-advisors around today. 

Micro-investing pioneer Acorns was founded in 2012, followed by Stash in 2015. 

Robo-retirement company RobustWealth was founded in 2015 (but was absorbed into its parent company, Principal, in 2021, three years after its acquisition).  

Stage 3: Consolidation of Wealthtech 

While the world’s biggest financial institutions had incorporated robo-advisory technology in their own offerings for a while, the 2020s saw a change in their digital advice strategy. A period of consolidation began and many of the most successful robo-advisors were acquired for large sums. Nutmeg was acquired by JPMorgan in 2021 for nearly $5bn and Wealthfront was acquired by UBS a year later for $1.4bn. 

This is where we appear to be currently: the best Wealthtech companies have proven their business models and have drawn the attention of the financial world’s big beasts. 

Future of Wealthtech 

What does the future hold for Wealthtech? Who can say for sure, but here are some of our predictions: 

Further consolidation 

It seems likely that further acquisitions of some of the biggest Wealthtech companies will follow Nutmeg and Wealthfront. Although still small in comparison, robo-advisors have built up sizeable AUM (assets under management) and have a proven business model. Companies could also be acquired for their analytics models and plugged into established offerings, finding synergies that way. 

Betterment is still independent—could this change in the next few years? 

Increasing technological sophistication expands appeal of robo-advice 

While there remains scepticism about robo-advice (albeit not evenly across age groups), the continuing improvement of advice and advice delivery will see robo-advice gain ground on human/expert advice. Just as how shopping on mobile phones feels normal to most people now (compared to ten years ago when people were still suspicious of it), taking advice from an algorithm will be normalized. 

Algorithms will be improved in terms of analytics and personalization; while AI and natural language processing will allow customers to talk to live chat robots as if they were a human wealth manager. 

Private Wealth solutions will gain clients 

While many Wealthtech companies target the mass market, companies such as Topaz will hone their private wealth offering, delivering an exclusive digital experience that mimics, or even improves on, the delivery of traditional wealth management services. The tech industry has been somewhat slow to turn its attention to private wealth management and a great opportunity exists to digitize many aspects of the sector, improving client experience and uncovering cost efficiencies for wealth managers. 

Increased investment into the sector 

Investments in Wealthtech companies has dramatically risen in recent years, and we expect this to continue. According to Fintech Global, Wealthtech investment in 2020 was more than double the 2019 figure, of $9.2bn vs $20.9bn—and that latter number only covered Q1-3 2020. The total number of deals grew by 7% in the same timeframe, suggesting that the average value per deal was greatly increased. 

While it’s probably fair to say we can’t expect Wealthtech investment to double every year, certainly there is momentum behind the growth.

Conclusion

Wealthtech is an industry to keep an eye on. At Windmill, we have been solving Wealthtech problems for clients for many years, such as delivering a slick onboarding experience, enabling a holistic view of wealth in one place, and, most importantly for us, building our own Wealthtech company, Topaz. If you have a problem with an aspect of your service, consider Windmill as your partner.