The wealthtech market, which ranges from robo-advisors to public trading apps and financial advisor infrastructure tech, was already approaching an inflection point as consumer views on wealth management changed over the last decade. Consumers want more real-time digital solutions and custom portfolios and options, which are still slowly emerging. This attitude shift has created opportunities for investors to help the industry innovate.

Venture capital firms invested nearly $1.6 billion across 60 wealthtech deals in H1 2020, according to CB Insights. This has more than doubled since H1 2017, when VC investment in the sector totalled $737 million.

This year is poised to see close to, if not, the highest investment total yet, and many believe companies are only at the beginning stages of an innovation evolution for the sector. “Wealthtech is a sector I’m really excited about,” Peter Johnson, a partner at US-based VC firm Jump Capital, tells sister title Venture Capital Journal. “There are a lot of changes going on in the wealth management tech area.”

Johnson, a veteran operator of the wealth management space, has dealt with the problems in the industry first-hand and seen how the industry has changed over the last few years. “When I worked with wealth managers and asset managers, I had a pretty good view of the industry and saw all the opportunities to improve what individual investors got. At the end of the day people got poor products, high fees and poor advice,” he says.

Years of groundwork

Wealthtech has arguably been one of the slowest areas to innovate within fintech due to its fragmentation and vast scale, but market changes have laid the infrastructure for the current drive towards innovation.

According to Dan Petrozzo, a partner at healthcare and fintech VC firm Oak HC/FT, multiple trends have helped foster this growth. This includes the creation of robo-advisors, the fintech buzz of the early 2010s, which opened wealth management services to a wider audience.

Many financial advisors were at behemoth companies like Merrill Lynch and Fidelity or worked at a local single-location firm, which made it hard to sell technology or software to either end of the spectrum. “What’s happened over the last decade is those advisor firms have been rolling up,” Petrozzo says. “If you had a solution and you wanted to sell it to all of these mom-and-pop advisors it was hard because there was no centralisation. I think more companies, than traditionally, will go after that area.”

Johnson adds that with these changes has come greater opportunity for market segmentation, which allows for more innovation aimed at customers with varying degrees of wealth.

Despite such progress, the pandemic has shone a light on how much further wealth management has left to go to be a meaningful digital player.

“It’s very apparent today through covid-19 that wealth management is broken,” says Rob Antoniades, a general partner at fintech-focused Toronto venture firm Information Venture Partners. “It’s an old model. It’s a very transaction-based, paper-based, in-person based market. When you think about the world today, especially post covid-19, it’s the exact opposite.”

Coronavirus has exposed these inefficiencies, yet multiple investors say the industry was already trying to innovate for future challenges. “For the traditional financial advisors, one of the biggest trends in the coming years is how do those individual financial advisors keep up in a world that is more personalised and online,” says Johnson.

An issue on the minds of investors is how the industry will adapt to remain relevant as the current swathe of generational wealth is passed down to younger investors unlikely to seek the same wealth management products and solutions. “One of the things that we have been keeping an eye on is this transition from traditional investors to millennials,” notes Antoniades.

David Jegen, a managing partner at healthcare and technology-focused F-Prime Capital, says this is an area his firm is interested in: “When the wealth transfer happens, how do the kids respond? I think it’s going to be a pretty big shift to a new type of advisor with consumer-friendly solutions that kids or investors prefer. Many of the names we see today like [the robo-advisor] Betterment will be inheritors of that wealth transfer. They will have the tools the next generation likes to use.”

These younger investors do not just want a more digital solution, many are also seeking customised financial products where mutual funds and bonds just won’t cut it. Petrozzo says these individuals are looking for more flexible solutions, not unlike what institutional investors ask for, in terms of made-to-order portfolios that may have a preference towards ESG or might avoid certain stocks or markets.

“It’s really exciting to think about the tools that need to be built to allow people to be able to create custom portfolios at scale, there is really nothing out there yet,” adds Jegen.

AI-built portfolios

Antoniades predicts artificial intelligence companies and solutions will come into play to help create these custom portfolios and also keep them balanced, transparent and on track. “We were looking for technology that automates the rebalancing of a portfolio and using AI to construct a better portfolio for the individual,” Antoniades says. “I think that is going to happen reasonably quickly.”

The retirement sector is another area ripe for change. “Over half of individual assets are in 401k plans,” Johnson says. “They are unquestionably behind, years behind on the individual side. That will be one of the next places we will see innovation.”

Investors also see change heading to the institutional and alternative money management space. Petrozzo cites companies like iCapital, which connects high-net-worth investors to alternative asset classes, as examples of potential innovation to come.

“A little further out, but bringing technology to pension funds, I think we are going to see a massive amount of investment into more efficient pension fund management,” Antoniades adds.

Other areas investors are keeping watch for are the further integration of cryptocurrency into wealth management and the increase of start-ups focused on financial literacy and planning tools for consumers.

“I think we are overall still in the early stages,” Antoniades says. “There are a few things that are more mature, like robo-advisors in the US, but you’ve probably identified the five companies that are going to succeed. Wealthtech as a sector, we are out of diapers, but we may still be in preschool or perhaps kindergarten.”

While the pandemic might show the broader venture ecosystem the innovation required in the sector, many investors saw the writing on the wall years ago and look toward the opportunities that will continue to emerge as the pandemic fades.

“The whole wealth management ecosystem needs to change to reflect the world that we are in and covid-19 has been a perfect accelerant,” Antoniades says. “You will see a lot more interest in wealthtech going forward because there will be a lot more spending by financial institutions.”