Democratization of finance is the process of removing control of the finance industry away from financial institutions and distributing the power among the public. Democratization can come at various levels -giving access to what was previously only offered to institutional investors, to high-net-worth investors, and making services and solutions only offered to high-net-worth investors, to the mass affluent.
Largely driven by the advancement of technology, the democratization of investments also emerged from tighter regulations in investor protection. Higher transparency in products and fees drove many banks to switch from pure product-focused recommendations to standardized advice based on diverse product packages. Additionally, many banks had no choice but to widen the customer target group and offering, staying on the hunt for new revenue streams from recurrent advisory fees instead of commissions.
The advancement of technology contributed to the proliferation of wealth management services and the rise of non-financial players that offer low-cost, automated investments mimicking traditional portfolio management in the form of proprietary algorithms managing customer portfolios. We are already seeing big tech companies, such as Google, Apple and Facebook, looking to break into the financial services industry. While many expected robo-platforms endanger high-end wealth management, taking over its market share, the platforms ultimately cater to investors with lower assets. This brought a new kind of customer segment to the wealth management digital marketplace. Privileges that used to be reserved exclusively for HNWIs are becoming available for regular investors and retail banking customers.
Financial institutions have played catch-up to challenger banks and fintech companies for a few years now. Digital investment platforms have centered mostly on the needs of retail investors, while HNW and UHNW clients continued to rely on a personal, relationship-based service. However, wealth managers are now realizing that this model is flawed, in that HNW clients expect a digital experience and services as part of their overall manager relationship. The challenge is to provide a low-cost, digital experience that matches the level of their personal service.
Effectively serving the world’s wealthy is going to get far more complicated in the years ahead. As the demographics of wealth shift, so will the needs and expectations of wealth clients. According to BCG, over the past 20 years, personal financial wealth globally has nearly tripled, rising from $80 trillion in 1999 to $226 trillion at the end of 2019. The group predicts that HNW and UHNW will remain the fastest growing segments in North America and that the affluent band will be the fastest-growing segment in Asia, Western Europe, and the Middle East. The Middle East and Latin America are also expected to see their share of cross-border wealth 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 need to use technology and hybrid models to aggressively undercut traditional wealth management providers and offer simple, but appealing, investment solutions across their existing client base. These offerings will be especially attractive to clients in markets with few established wealth management providers. Asset managers will leverage their superior investment capabilities to win new clients through direct channels.
As digitization lowers barriers to entry to wealth management as a business, competition will intensify and offerings that once provided differentiation will face commoditization. In the past, offering this level of customization would have been cost-prohibitive. But advances in technology will allow wealth management providers to create highly tailored 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 from both.
Wael Salem, CEO at Tradesocio.