There are 3 waves of innovation in the general financial services industry: One disrupting banking, another disrupting the insurance industry, and a third – although it’s still early in its disruption cycle – innovating in the space of asset and wealth management, an area of FinTech also known as WealthTech.
If you look at how many companies, how much innovation and how many investments have been made in the banking and insurance industries compared with the wealth and asset management industry, the difference is pretty clear, especially when you account for the sheer size of that industry. WealthTech still has relatively fewer companies and relatively little disruption, while basically suffering from the same sort of challenges that created the need for innovation in the other two areas of FinTech when they were in their early stage of innovation.
There are probably a few reasons as to why there is less disruption and entrepreneurial activity in WealthTech. One might be because it’s considered less “sexy” than some of the other more hotly populated areas of FinTech, or perhaps due to a lack of awareness. Also, it could be a case of “out of sight, out of mind”: Many of us do not interact on a daily basis with wealth managers or asset managers (compared with our level of interaction with general banking and insurance organizations), and it’s also a long-term concern, meaning that we face costs and procedures around banking and insurance far more frequently in the present, whereas we think about wealth and asset management further down the road, usually when we reach retirement. But of course, by then it’s often too late for those who were not prudent enough to deal with it much earlier in their lives.
There are 3 main areas of WealthTech application:
1. Consumer-facing. This is where customers can benefit from more choice, transparency and accessibility, more convenient communication with their service providers, and of course better personalization and adaptability, meaning that asset management is tailored to individual consumers based on their specific circumstances and requirements both now and as they change (for example as they age, or their marital status changes, etc.).
Innovation in WealthTech can help consumers to better understand where they stand in terms of their own wealth and assets, what is their aversion to risk and how to plan ahead for their specific needs as well as those of their family members more accurately, including what trade-offs are most appropriate now, in the short term and in the long term. For example, how should one allocate his assets toward his retirement, his kid’s college fund, his beach house in the Caribbean, etc. Many people can’t answer these types of questions accurately, and many of the current tools used to understand the customers’ needs and goals are very arcane, so there is definitely a need for technologies to innovate in this area.
2. Investment Advisors/Brokers. In order for consumers to be able to make decisions about their wealth and asset management, brokers need to be able to use tools that can paint more accurate pictures of financial scenarios and offer the best possible solutions. Many people view the whole process of reviewing and managing their assets as very daunting, which only further validates the need for WealthTech innovation in this area. Something as critical for your long-term well-being as wealth and asset management should not be deemed with the same sort of disdain as a trip to the dentist (no offense intended for anyone in the dental profession). It’s somewhat understandable, because many people find having to deal with long-term plans as bothersome in the present, but that’s the whole point. WealthTech innovation in this area can give brokers the tools they need to remove the ‘bothersome’ element of this super-important part of our lives.
Another thing which is very important for brokers is scalability. Today, due to regulations, investment advisors are limited in the number of people they can service, which adds to their overall inefficiency and lack of profitability, and this is again challenge that new innovative technologies can solve.
3. Asset Managers. Like any other bank or business that has customers to look after, asset managers must also service the customers in the various specialized areas of wealth management. This spans the whole process, from acquiring customers efficiently, offering personalized products to them, reducing churn, maximizing the lifetime value, automating to improve efficiency and scalability, and reduce the costs of managing sometimes millions of accounts (with many brokers in the middle), etc. And of course, their own performance as asset managers is measured by the level of returns they are able to procure for their customers, which means they also need to allocate capital more efficiently to a more diversified asset class in order to generate higher returns.
Also, as the space becomes increasingly more regulated, the regulatory burden on asset managers increases dramatically. Challenges such as KYC, AML, reporting and many more are real threats to the industry and technology can and must come to the rescue.
There are huge opportunities for innovation in WealthTech not only for end-users but also for service providers in the industry who still rely on a toolset that has yet to benefit from the type of advancements in technology that are already flourishing in other areas of FinTech. And like many areas of innovation, once you “unlock” the possibilities in one area, you create a whole new set of opportunities to innovate in a related or complementary area; innovation in one can influence and impact on another, which is why it’s important to address all three of the applications I described above.
The problem is that at the moment there are not enough disruptors in the WealthTech space, and we are hoping to see more of them tackle the immense opportunities that it holds. In Israel, we believe – based on our knowledge of local the talent and track record – that Israeli FinTech entrepreneurs would probably excel at addressing the challenges around Asset Managers rather than the areas of consumer-facing or brokers, only because those areas tend to rely heavily on a familiarity and understanding of the local geographical market. Although it’s of course possible for Israeli FinTech entrepreneurs to tackle all of aspects of WealthTech, their strength is usually in the back-end, with things like enterprise efficiency etc., so we expect that that’s where they will probably focus their efforts. Israeli startup Pagaya (a Viola portfolio company) is a great example.
We hope that FinTech entrepreneurs will heed the call to disrupt this important but relatively overlooked industry, and in shaping the future of WealthTech, they will also reshape the financial ecosystem around the world.