An Inflection Point for Wealth Management?

By Brian Nixon

While banking-related fintech startups and solutions continue to dramatically grow, wealth management and fintech pairings are lagging behind by a factor of five to one. And unlike many banking and fintech partnerships, which are complementary, more fintech startups in the wealth management sphere primarily are focused on replacing wealth managers rather than helping them do their jobs better and more efficiently, according to fintech entrepreneur Benjamin Gross.

Wealth management fintech solutions also seeing far less investment than products for other banking applications. “Almost five times more startups are building technology for banks than they are for wealth management,” Gross says. As a fintech entrepreneur himself (Gross is the CEO and founder of Visualize Wealth, which provides a comprehensive “nutrition label” look at wealth management client’s portfolios), he contends that wealth management firms aren’t engaging with startup technologists as effectively as banks do.

Partly as a result, wealth management startups aren’t looking to augment wealth management firms or bank wealth management departments. Instead, they’re looking to replace them.

“In banking, for example, a bank might say, ‘I want a faster way to get a FICO score,’ Gross says. “So, the bank hires people to build technology to do that. Then you have a symbiotic relationship between the bank and the startup. That’s what’s called an augmented relationship.”

In contrast, the “replace” technology is fundamentally different. “That’s a startup coming in and saying, ‘I’m going to replace a bank. I’m going to completely replace your business,’” Gross says. “We are at a crucial inflection point for wealth management.”

Compounding the issue are demographic trends. Wealth managers are getting older—half of them are more than 50 years old. “What we see is an aging demographic—100,000 financial advisers are expected to retire over the next decade.”

This changing of the guard is noted by ABA Chairman Dorothy Savarese. Her institution, Cape Cod Five Cents Savings Bank, in Orleans, Mass., has a $1 billion trust department and she is keenly monitoring industry trends. “We’ll have an existential crisis if we don’t train the next generation,” she says.

Much has also been written about robo-advisers as a solution for replacing aging wealth advisers (including in this magazine). Yet, the fact remains that “human beings don’t feel comfortable getting all their financial advice and financial decisions from a robot,” Gross explains. Even robo-heavy firms, such as Betterment, have backed away from purely digital wealth management services.

But the trend still signals a shift away from the common role of advisers being independent “equity owners,” Gross says. “You’re essentially an equity holder. I would argue that what Betterment is looking to do is to capture that equity stream.

“There are table stakes at risk here because you go from the financial adviser being the equity holder—being the owner of the business and being paid on assets under management—to being a W-2 employee,” Gross adds. “This is one of the biggest things that the wealth management industry has got to solve.”

On a positive note, he adds, this is what fintech specializes in doing: “What fintech does really well is it takes big hairy problems that a bunch of different people are dealing with and figures out how to build technology to solve it.”