Wednesday, April 19, 2017

Fintech Disrupts Wealth management

Today a typical mutual fund or a ULIP fund in India charges 2.75% for managing your money.

Plenty of investors would be surprised at what a large proportion of their returns go to expenses. 2.75% sounds like a modest figure. However, that's 2.75% of the total amount, which includes the principal which is yours to begin with. The service you get, which you are paying for, is getting returns on your money. When seen with this perspective, the expenses charged can be very high.

With Robo advisors on the horizon, how long can fund managers charge such high fees?

The concept of "robo-advice" The use of automation and digital techniques to build and manage portfolios of exchange-traded funds (ETFs) and other instruments for investors has gained significant attention within the wealth management industry.

Current robo-advice capabilities remain fairly basic. In general, they use simple surveys to profile clients and to assess their needs. An asset allocation is proposed, adjusted and implemented.
Portfolios are monitored, re-balanced and reported on. Robo-advice streamlines the account opening process, and its ability to transfer assets is increasing. All in all, it represents a useful basket of services at an attractive price

Robo advisor can reduce the fees charged for managing your money to less than 0.5%, and it presents investors with an interesting value proposition.

Although robo-advice to date has gained only a minuscule share of assets under management, I expect Robo-advice to grow rapidly in next few years. I anticipate that competition, innovation and new technology will dramatically increase robo-advice capabilities in the near future. Future
versions will consider the client's complexities by adapting questions based on earlier responses to fully understand investor needs.

In developing a financial plan, they can assimilate multiple goals, including college savings, planned home purchases, retirement, protection needs, estate planning and the need for health care and/or long term care coverage. In proposing investment solutions, they will be able to
incorporate outside assets, handle individual securities, ladder bond portfolios, consider low tax basis holdings, and allocate around illiquid positions. They will help clients understand their portfolios by providing information and learning in the context of the financial results and market information being presented.

There are also elements of the roboadvice experience that clients prefer over traditional models. Investors like the privacy offered by a digital solution and the ability to learn, and to chart their own path. These benefits will be expanded on in future releases.

Over the next decade and beyond, emerging technologies, such as cognitive computing, will power major advances in robo-advice capabilities. We anticipate a rapid evolution towards an automated advisor assistant that can even provide complex advice, and that will also allow clients to interact with the digital assistant in a multi-step process rather than a one-time effort. This will help to serve clients even more effectively.

Over time, investors who have low-cost and reasonably effective alternatives to traditional wealth management programs will not be willing to pay premium prices unless they see real differentiation and value.

Financial advisors will remain central to wealth management, but robo-advice will add new capabilities that wealth management firms will need to adopt and integrate.

Fintech Disrupts Wealth management 

Although a high level of disruption triggered by FinTech is already beginning to reshape the nature of lending and payment practices, a second wave of disruption is making inroads in the
asset & wealth management sectors.

A survey done by Price Waterhouse Cooper's found that this financial houses are already feeling the heat. Nearly 50% of insurers and asset and wealth managers consider their respective industries will be the most disrupted.

The investment industry is also being pulled into the vortex of vast technological developments. The emergence of data analytics in the investment space has enabled firms to hone in on investors and deliver tailored products and automated investing. Additionally, innovations in lending and equity crowd funding are providing access to asset classes formerly unavailable to individual investors such as commercial real estate.

When asked which part of the Financial Services sector is the most likely to be disrupted by FinTech over the next 5 years, 74% of insurance companies identified their own industry, 51% of asset managers said their industry will be disrupted.

Venture capitalists are looking very closely at start-ups dedicated to reinventing the way we invest money and buy insurance. Annual investments in InsurTech start-ups has increased fivefold over the past three years, with cumulative funding of InsurTechs reaching $3.4bn since 2010.

The pace of change in the global insurance industry is accelerating more quickly than what is being imagined. The industry is at a pivotal juncture as it grapples with changing customer behavior, new technologies and new distribution and business models.

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