The New Wealthtech

27 January 2020

The fintech revolution is coming to wealth management. Robo-advisors are leading the way, but the changes in wealth management are just beginning. Many large brokerages in the US eliminated commissions on stock trades in the fall of 2019. As zero-commission trading takes hold everywhere, robo-advisors will have far more scope to trade. Wealthtech is changing the world of finance, and firms must find new sources of revenue.

Rise of the Robo-Advisors

While robo-advisors cannot replace human financial advisors, they have grown tremendously and expanded access to financial markets. Robo-advisors can automatically adjust holdings based on current conditions and personal preferences using specially developed programs. The very first robo-advisors were created in 2008. According to EY, the top four robo-advisors had 128 billion US dollars in assets under management by late 2017. Furthermore, Deloitte reported that robo-advisors might manage as much as 16 trillion US dollars in assets by 2025. Robo-advisors will soon be able to create custom portfolios containing hundreds or even thousands of stocks for average investors.

The Zero-Commission Revolution

Zero-fee stock trades are essential for making customized portfolios cost-effective for the masses, and they are already here. Robinhood is widely credited with introducing zero-commission stock trades in the US, while BUX and Revolut brought free trades to Europe. The growth of fintech and cryptocurrencies has been fueled by falling transaction costs, with zero transaction fees as the final goal. The future arrived quite suddenly in 2019, as Charles Schwab, Fidelity, and even Bank of America all began offering free stock trades in the United States. This dramatic development seems likely to spread to financial markets around the world in the next few years.

The Future of Fractional Share Trading

Fractional share trading is also necessary for building custom portfolios because shares are too expensive for ordinary investors to buy hundreds of stocks. Cryptocurrencies showed that today’s technology makes financial assets almost infinitely divisible. Established wealth management firms are taking notice. Charles Schwab has already announced plans to introduce fractional share trading. Most mathematical formulas and personal budgets will almost always lead to buying something other than whole shares of stocks. The new wealthtech is helping markets catch up with economic theories and better serve customers.

Subscription Services and Hourly Fees

Financial institutions are finding new ways to profit as wealthtech eliminates transaction fees. For example, Interactive Brokers requires $10 per month for enhanced accounts with balances under $100,000. As robo-advisors become almost universal, financial firms will be able to charge similar fees for access to the latest features. These new fees are the financial market equivalent of subscription services, such as Microsoft Office 365. The other path is toward hourly fees for services that only human financial advisors can provide. Investors are often their own worst enemies. Financial psychologists who charge hourly fees for consults should still be able to make money because they can save their clients far more.

Adapting to Change

The new wealthtech is not the end of the financial industry, but it does mean that financial institutions will have to change how they do business. New software will eventually be needed nearly everywhere to deal with robo-advisors and their ability to ceaselessly trade stocks for free. Trading 24 hours a day every day also seems to be in the future. Financial institutions must continue to adapt to retain customers and remain profitable.


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