Is WealthTech the future of advisory?
WealthTech is shaking up the financial advisory world. But does it mean the end of traditional wealth managers, financial advisors and RIAs?
🌎 Macro opportunity
The Great Wealth Transfer is upon us. Over the next 25 years, around $68T will pass from Baby Boomers to younger generations (Cerulli Associates). This massive transfer is a golden ticket for Fintech companies ready to transform financial advice. Using technology can democratize access to top-tier advice, boost efficiency, and offer ultra-personalized strategies. This goes beyond what robo-advisors like Betterment (over $29B in assets, 700,000+ clients) have done in the past decade.
📊 Market Trends
WealthTech startups raised ~$4B in 2023 and $500M in Q1 2024 (CBInsights). Several trends are driving this rapid adoption:
- Hyper-personalization: today’s clients want unique advice. With Plaid or MX, RIAs can aggregate financial data from multiple sources to deliver personalized advice.
- Behavioral finance: platforms like Addepar, Nitrogen Wealth or Vanilla deliver tailored strategies and help advisors align investments and estate planning with clients' risk tolerance, using behavioral finance to guide decisions.
- Democratization of alternative investments: Securitize/Onramp Invest lets RIAs include crypto assets in portfolios, modernizing wealth management.
💥 Impact on Business Models
WealthTech is transforming RIA operations in several ways:
- Efficiency and automation: Vise or Orion automate portfolio management tasks. Advisors can manage more clients without a proportional increase in costs, boosting profitability and market share. Cost savings may be passed on to clients.
- Comprehensive planning: advanced analytics and data aggregation help RIAs craft more holistic plans. Tools like Envestnet or Asset-Map improve client engagement and visualization of financial situations. This often translates into stronger client retention and can justify higher fees or fee-for-service models.
- Tax planning: other tools automate tax return analysis, integrating into broader financial plans.
WealthTech also enables more flexible pricing structures. Traditional AUM fees are being supplemented by subscription-based models, flat fees, and performance-based fees. This allows RIAs to attract a broader range of clients, including those with lower AUM.
In short: WealthTech isn’t about pushing traditional wealth managers out, but augmenting them. With technology, they can blend high-tech and high-touch services. This shift may be gradual, and many WealthTech companies will need a longer runway to crystallize this opportunity. Partnering with investors who seek durable expansion is key. By balancing capital and operational discipline, structured growth equity might help them stand the test of time — through the Great Wealth Transfer.