Wealthtech Trends, Drivers, and Challenges

Wealthtech firms hope to improve essential wealth management services. Both new and established players are bringing emerging tools—like predictive AI, machine learning, and algorithms—to the world of finance.

Wealthtechs can monetize their offerings through:

• Transaction fees.
• Monthly subscription fees.
• Advertising on free services.
• Interest on cash in client accounts.
• Fees on assets under management.
  

PitchBook analysts expect the wealthtech market to grow to over $2 trillion by 2027. Wealthtech startups have a long runway for growth, with a large potential market to mine.

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Fintechs apply technological advancements to make financial processes easier, more powerful, and more affordable.

Fintechs can compete with existing institutions or collaborate with them to create brand-new services or capabilities. They hope to change how people borrow, spend, or save.

Wealthtech is a subset of fintech. As an alternative to traditional wealth management, wealthtech helps investors or their advisors manage their finances with advanced technology.

Hyper-personalized service

Investors have grown used to personalization powered by tech.

When consumers order Starbucks on their phone, they can adjust flavors to their taste. Amazon.com recommends products based on their past purchases. Even spam emails come addressed with their name.

For investment portfolios, where the stakes are much higher, investors seek out responsive firms that can personalize their plans to their financial goals.

Wealthtech can help trusted financial experts create tailored client experiences. Digital tools offer a new way to engage with customers, improve the advisor experience, and build loyalty.

Wealthtech can transform how consumers connect with their financial planners. Customers expect a digital-first, multichannel approach. They want options to make investment decisions with video calls, chat, financial apps, and social media.

Growing adoption of digital experiences

Investors can research investments, buy and sell stocks, and monitor their portfolios on their own. As passive investing grows in popularity, advisory firms need engaging digital experiences to convey their value (and justify their total expense ratios).

If your digital experience is stuck in the 2000s, why should investors trust you to stay on top of today’s market?

The coronavirus pandemic fueled baby boomers’ adoption of digital financial services. After years without in-person meetings, they grew accustomed to online experiences. Their demographic comes with its own needs. These investors need to manage their retirement savings, healthcare savings, and financial plans to support both aging parents and adult children.

Clunky digital experiences can stand between an advisor and the prospects they hope to engage. Legacy systems also slow down financial advisors: When they can’t connect tools, they lose time toggling between lagging platforms.

Outdated systems also create hurdles at the firm level. Often traditional platforms are stuck to local infrastructure that won’t migrate easily to the cloud. It takes time to train advisors on new tools and adjust their workflows.

Deep understanding of the connected consumer

On average, Americans have seven to eight financial accounts—checking, savings, credit cards, investments, and employer 401(k)s. Wealthtech can create a seamless user experience that makes it easier for clients to see their money in one place.

Aggregated accounts also serve to give financial advisors a broad perspective of client wealth. The fragmented banking landscape also makes it harder for advisors to offer guidance on a client’s whole financial picture, beyond held assets.

Wealthtech offers visibility into investments across asset classes, institutions, and taxable and non-taxable accounts.

The experience looks simple on the surface but relies on a handful of players behind the scenes.

Financial data aggregators establish connections to tens of thousands of financial institutions. Because the U.S. banking industry is so splintered, financial aggregators need connections to at least 15,000 data sources for a workable service.

But an evolving trend could unite individual players into one fluid system.

A growing wealthtech ecosystem through financial data aggregators

Open banking is a system that allows financial data—with consumer permission—to flow between banks, fintech firms, and other financial institutions. Through application programming interfaces (APIs), software programs can communicate with each other and share data.

Open banking gives consumers more control over their data and empowers financial players to change how they deliver financial services.

Open banking is already gaining steam in the European Union, propelled by regulations. In the United States, firms have come together to create new, collaborative opportunities. Wealthtech hopes to leverage big data and automation to do more for advisors and investors.

As intermediaries, financial data aggregators will play a critical role in the connections and movement of data throughout the new ecosystem.

For wealthtechs and their partners, creating new connections can come with a cost. New data providers can be expensive to integrate, which can give some firms pause. Growing webs of connections also need to grow with a business, leaving an organized record trail for future audits.

When data breaches dominate the news, consumers are understandably worried about the safety of their information. Wealth management firms must protect sensitive data to retain business and generate referrals.

Direct connections provide a more reliable data source. Instead of a consumer re-entering login credentials, creating more access points for bad actors, direct connections allow one institution to securely store data.

Expanded access for investors and advisors

Traditional wealth management tactics are often reserved for high-net-worth families. More affordable tools can expand access to a broader customer base: young workers, middle-income families, and other growing demographics.

The younger generation is more likely to focus on investing over saving and budgeting. Fintech has expanded access to previously expensive tactics like fractional share purchases, direct indexing, and no-fee stock trading. With more tactics in their pockets, wealth managers can expand their practice to a wider range of investors.

Wealthtechs can push the boundaries of what’s possible with the right data.

With enriched data, wealthtechs can quickly bring their innovative products to market and scale. Investment-first data can power some of the most common wealth management tasks.

Here are a few.

Proposal generation

Compelling investment proposals lay out why an investor should trust in your advice or switch from their current plan. Wealthtechs can help advisors build comprehensive plans with rich information on risk-adjusted performance.

With tools like Morningstar’s Investment Screener, users can filter investments by personal criteria. Screeners can be the first step in analyzing the extensive database of global investments.

Other components, like a risk profile assessment or asset allocation tools, show clients how behavioral tweaks could affect the likelihood of reaching their investment objectives.

Performance reporting

Performance reports are only valuable when they’re accurate. Wealthtechs can ensure that advisors have access to reconciliation-ready data, without the gaps and errors that slow firms down. Advisors also need to be able to reconcile daily transaction activity to stay ahead of compliance requirements.

With smarter tools, advisors can access all client data, not just the accounts under their management. Improved back-office efficiencies also save time and money for the firm.

Portfolio analysis

Better portfolio analysis tools need specific data from banks, credit card providers, lenders, investment firms, and insurance companies. Partial pictures won’t do the job.

Wealthtech tools can help advisors understand when and why a client needs to diversify their portfolio. Dig into how underlying investments overlap for a deeper analysis of risk exposure, sector exposure, and stock intersections.

Morningstar’s Portfolio Analysis API delivers visuals for easy-to-read portfolio details, drilling down to the security level.

Financial planning

As advisors deal with intensifying fiduciary regulations and client expectations, advisors must deliver more value, more efficiently. Wealthtechs can help advisors plan client finances with a big-picture perspective.

Integrated tools connect goal-setting, risk assessment, and investment planning so advisors can help clients reach their goals. By looking at their entire financial picture, advisors can make recommendations for individual definitions of success: paying for a child’s education, supporting a charity, retiring in comfort.

Simple, easy-to-use tools can also help investors visualize the impact of small behavioral changes. Better tools can lead to more productive investor-client conversations and more personal plans.

They can also save time for advisors. Instead of digging financial documents out of a safety deposit box, advisors can connect and digitize records for easy client onboarding.

Financial wellness

In light of record-breaking inflation and a precarious global economy, adults in the U.S. are stressed about money at the highest-reported level since 2015.

Today, advisors can help alleviate stress through personal insights that help clients understand their financial position. To get there, advisors need access to technology that enables them to best serve their clients at scale.

Investors need a full view of their finances for productive discussions with advisors. The right tools can help advisors show their unparalleled value and foster stronger relationships that build AUM.

Fact Sheets

PitchBook, a Morningstar company, divides wealthtech firms into six subsegments.

Advisortech

Advisortech solutions leverage software to help advisors and financial planners work more efficiently, better serving clients while they grow their practices. New tools touch every phase of the advisor/client relationship, from marketing to financial planning to billing.

Advisortech responds to the increasing demand for digital experiences. With access to the client’s full financial picture, advisors can offer insights on both held and held-away assets.

One example is Altruist, which developed a digital investment platform to help financial advisors serve clients. The platform automates research, streamlines operations, and allows advisors to purchase fractional shares.

Alternative investments

After a turbulent 2022 stock market, some investors became interested in exploring other investment types. With affordable fees, wealthtech companies like YieldStreet expand access to asset classes that were previously the domain of institutional investors.

While cryptocurrency is one of the best-known alternative assets, the asset class also includes real estate, private equity, hedge funds, art, collectibles, and commodities. To invest, investors need evolving data sets to analyze potential payouts and risks.

Brokerage

These wealthtech companies create self-directed online trading platforms where retail investors can buy and sell stocks, bonds, and options. Online brokerages act as the intermediary between investors who hope to buy and redeem shares.

Wealthtechs have pioneered new business models that expand the target market. One example is Stash, where investors can buy fractional shares with no add-on trading commissions, so they can save small sums of money and make micro-investments.

Digital advisory

Digital advisory wealthtechs offer investment management tech such as robo-advisors and other automated services. The growth of this sector reflects a burgeoning worldwide interest in low-fee, passive investment strategies.

Established players have also launched robo-offerings, like Vanguard’s Personal Advisor Services, that have amassed hundreds of billions in AUM.

However, new technologies like machine learning are opaque, often without clear explanations for the inner workings of their algorithms. That lack of transparency might scare off potential users.

Investment tools and platforms

Some wealthtechs supplement the financial planner role with services that support individual portfolio management. They share financial data, research, educational resources, and other investment tools.

One example is Clarity AI, a developer of a sustainability technology platform designed to deliver environmental and social insights. The company's platform uses machine learning and big data to help investors understand and optimize social and environmental impacts.

Retirement planning

Some wealthtechs focus on managing savings and planning for retirement. These companies help investors save for retirement by setting financial goals, risk tolerance, and investment strategies.

Firms like Guideline automate investment technology to help users optimize their retirement potential plan and save for the future.

With access to fresh emerging tools, advisors can transform how investors engage with their finances. Wealthtechs can uncover new possibilities and invent mind-blowing experiences with access to trusted data and analytics.

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