Democratization of Finance and Investment
Financial democratization is the process of removing control of the financial industry away from financial institutions and distributing power among the people. Democratization can come at many levels – giving access to what was previously only offered to institutional investors, to high net worth investors, and making services and solutions offered only to high net worth investors, to mass prosperity.
The Democratization of Investing
Driven largely by technological advances, the democratization of investment has also emerged from tighter regulations on investor protection. Higher transparency in products and costs prompted many banks to shift from purely product-focused recommendations to standard suggestions based on a diverse product package. In addition, many banks have no choice but to expand their target customer group and offer, still hunting for new revenue streams from recurring advisory fees instead of commissions.
Technological advances have contributed to the proliferation of wealth management services and the rise of non-financial players offering low-cost, automated investments that mimic traditional portfolio management in the form of proprietary algorithms that manage customer portfolios. We’ve seen big tech companies, like Google, Apple, and Facebook, looking to get into the financial services industry. While many of Rob’s advisory platforms are expected to jeopardize high-end wealth management, taking over its market share, the platform ultimately serves investors with lower assets. This brings a new type of customer segment to the digital wealth management market. Privileges that were once reserved exclusively for HNWIs are becoming available to regular investors and retail banking customers.
Financial institutions have been playing after challenger banks and fintech firms for several years now. Digital investment platforms are largely centered on the needs of retail investors, while HNW and UHNW clients continue to rely on personal, relationship-based services. However, wealth managers now recognize that this model is flawed, in that HNW clients expect digital experiences and services as part of their overall managerial relationship. The challenge is to provide a low-cost digital experience that matches their personal service level.
Effectively serving the world’s wealthy will be much more complicated in the years to come. As the demographics of wealth shift, so do the needs and expectations of wealth clients. According to the BCG, over the past 20 years, personal financial wealth globally has nearly tripled, rising from $ 80 trillion in 1999 to $ 226 trillion by the end of 2019. The group predicts that HNW and UHNW will remain America’s fastest-growing segments. North and that affluent band will be the fastest growing segments in Asia, Western Europe, and the Middle East. The Middle East and Latin America are also expected to see their share of wealth across borders grow slightly faster than the global average over the next five years.
With the large and growing affluent and HNW segments in mind, retail banks and asset managers will need to use hybrid technologies and models to aggressively undermine traditional wealth management providers and offer simple, but attractive investment management technologies across their existing client base. This offer will be especially attractive to clients in a market with several well-established wealth management providers. Asset managers will utilize their superior investment capabilities to win new clients through direct channels.
When digitalization lowers the barriers to entry to wealth management as a business, competition will increase and supply that was once differentiated will face commodities. In the past, offering this level of adjustment would be cost-prohibited. But advances in technology will enable wealth management providers to create highly customized portfolios at a fraction of the current time and cost. The historical distinction between advisory and discretionary products will fade, as innovative mandates combine elements of both.