Once the domain of the ultra-wealthy and the George Soroses of this world, wealth management has changed a great deal in recent times.
Aided by advances in technology, the subsequent rise of fintech, and finally COVID-19, the barriers to small-scale investing are increasingly being dismantled.
Forbes deems this “the greatest market democratization of our times,” bearing the promise of greater accessibility and lasting change within the investment space. However, while diversification of the world investor base and decreased gatekeeping are undoubtedly something worth celebrating, the phenomenon raises an important question — or two.
Will this trend cause a seismic shift within the field of finance, or are we still lightyears away from overturning the status quo supported by traditional wealth management institutions? Also, what are the potential implications of the rise of these new investment opportunities for those who were previously denied access?
Wealth management history 101
The history of wealth management can be traced as far back as the 1300s, starting with the Venetian moneylenders and evolving into what we now know as stock exchanges — the New York Stock Exchange is the largest with an equity market of just over $28.4 trillion.
While the means of exchange and historical context may set the two apart, both Venetian debt merchants and the modern-day stock exchange players had one thing in common: deep pockets.
According to a survey conducted by the Federal Reserve, stock ownership is dominated by the wealthy, with families in the top 10% in terms of income holding 70% of the value of all stocks. What’s more, stock ownership is also concentrated among those who are white (61%).
As a result, over time, the idea of wealth management has become synonymous with wealth consolidation.
This is no surprise given that it is high-net-worth individuals (HNWs have a minimum wealth bandwidth of $1 – 5 million), who history shows us have been privy to the fruits of the stock exchange, courted for private market opportunities, and targeted by banking giants.
Although it was never overtly stated that those on lower budgets couldn’t participate in the investment market, the minimum ticket size (i.e., an amount an individual invests) requirements ranged between $300k – $1.5 million, which did a good job of limiting wealth management accessibility.
Fintech meets COVID-19
“The only constant is change,” says a cliché. In this case, an apt one considering the extent of change that we’ve seen take place in the world of tech, finance, and more recently all of our lives, due to COVID-19.
While the wealthy had steadily trod the path toward ultra-wealth with their investment portfolios in tow, technological change continued — snowballed, if you will — with no end in sight.
As digital technologies increasingly became ubiquitous, redefining and transforming just about every aspect of our lives, it was only natural that our wallets and bank accounts wouldn’t be omitted.
And so they weren’t. At a time when companies such as Amazon, Netflix, and Apple set new standards for anticipating customer needs and providing personalized experiences, Forrester argues that we have naturally come to expect financial products and services to also fulfill our need for immediacy and cater to our decreased patience.
The birth of challenger banks such as Monzo and Revolut, in particular, has taken the sector by storm, forever changing the banking experience. From tedious queuing at the local branch to being able to access a variety of products from a device and place of your choice. Think payment transfers, currency conversion, cryptocurrency exchange, and — that’s right — stock trading.
And if embracing fintech products may have once seemed tepid, the rapid digital adoption driven by COVID-19 gave the industry a real push — leading to a 73% increase in fintech app interaction following the outbreak.
Fintech revamps finance
Encouraged by its success, particularly among Millennials and Gen Z, fintech didn’t stop at bringing banks into our homes. Armed with unabating tech advancements, an increasing user base, and our penchant for convenience, the sector went even further.
With upstart companies such as Robinhood, Public, Stash, and Acorns delivered in the form of smartphone apps as opposed to multi-storied Wall Street establishments, and offering commission-free trading, stock ownership and financial education, these alternative investment opportunities did not go unnoticed.
It sought to respond to the inequality in investment opportunities that pervaded the wealth management sector from time immemorial.
Their appeal is stretched across generations: the money-conscious Millennial/Gen Z drawn to the concept of an “always online” bank, as well as the Gen X/Baby Boomer who, due to COVID-19, began to truly understand the importance of long-term financial security — something that living paycheck to paycheck can rarely offer.
Enter: Alternative investment opportunities
Companies such as Robinhood only scratch the surface of the democratization of investment opportunities. A lot of the innovation within this space is concentrated around the much-discussed blockchains — that is, databases that store information electronically. Due to its proven guarantee of security, its use cases are wide-ranging. From aiding cybersecurity to supporting cryptocurrency systems such as Bitcoin, to — more recently — securely recording NFTs.
Cryptocurrencies and NFTs (non-fungible tokens) are both great examples of alternative investment entry points that have been changing things up in the world of finance. While both ultimately lend themselves to a more diverse investor base, they’ve developed in vastly different ways and therefore benefit the end user differently.
So far, cryptocurrency has shown itself to be especially accessible. After setting up a wallet to securely store your currency in and choosing an amount you’re comfortable investing, the process is nearly as simple as a bank transfer. Given the pace at which new currencies are emerging and Bitcoin’s value increase of 159.7% since last year, cryptocurrencies clearly mean business. For example, assuming someone invested $20,000 last December, today that person would have $51,970 — and that’s the same person traditional banking institutions would never have considered as an investor in the first place.
Although NFTs are still a relative newcomer in the wealth management space, their trading volume has increased by 704% between the second and third quarters of 2021. Similar to crypto, part of the appeal lies in its accessibility. However, unlike cryptocurrency, non-fungible tokens democratize both the investment space as well as the art world. They allow users to trade and invest in digital assets such as paintings — yet another arena reserved for the enjoyment of HNWs. Similar to crypto, all you need is a wallet and some cryptocurrency to get you started.
Both of the above investment avenues are growing exponentially with no sign of stopping while more and more money changes hands in pursuit of high returns. At the same time, companies such as Moonfare, an award-winning digital wealth platform, are also responding to lower-ticket individuals looking to invest their money. As such, in recent years, Moonfare has lowered its entry threshold and now allows individual investors to invest in top-tier private equity funds.
Despite the apparent change in the wealth management field, it may be too soon to accurately assess the scale of the democratization and microinvesting based on the success of individual fintech solutions alone. However, studies such as the one conducted following the enactment of Obama’s 2012 JOBS Act (which redefined “unaccredited investors” as “microinvestors”) help fill some gaps.
The study in question is the Broadridge study consisting of 20,000 households holding “stocks, mutual funds, and ETFs through intermediaries.” The dataset, spanning billions of data points, explores investor demographics and investment products, and ultimately points to a diversified investor community — starting younger, with fewer assets, and utilizing new technologies to get them started.
The future of investment democratization
The rapid increase in popularity of alternative investment opportunities and the exponential growth of fintech raises key questions regarding the future of wealth management incumbents.
Given that democratization of investment is likely to continue to expand with the help of developments in fintech, while digital natives become the most financially savvy generation — are traditional wealth management institutions facing an existential threat? Highly unlikely.
The range of resources and leverage that banking giants have accumulated and enjoyed for centuries is unlikely to be matched by fintech anytime soon.
The key piece of that leverage is trust — something the younger generations, similar to Baby Boomers, are unwilling to surrender to challenger banks.
After all, democratization of investment through fintech does carry a set of risks, which can be financially devastating to those entering the market without the due diligence and education it requires.
So, we will see a lot more yet from fintech and its increasing portfolio of low-budget investors. In order to really move the investment needle over the next decade, we’ll need to see clearer monetization strategies. Plus, given that the generational wealth transfer is slowly gaining momentum, understanding the unique concerns, needs, and values of Millennials and Gen Z will be paramount to fintech’s continuing success.