In the first part of our report on the WealthTech revolution, we looked at what is probably the most prominent representative of this sector, Robo-Advisory. We took a first shot at having WealthTech explained, but it’s only a part of the movement that turns the wealth management upside down though. In the second part we look at the other areas that so far have crystallised.
Digital Brokerage
A concept central to FinTech innovation is the replacement of the middlemen. So an idea that automatically springs to mind when you think about disrupting the investment world is to cut out the intermediary that buys and sells shares and bonds for investors and takes a fee for the services. That’s exactly what Digital Brokers do as well as giving you access to asset classes that usually are only open to accredited, meaning wealthy investors.
Robinhood is one of these digital brokers that let you invest in companies and exchange-traded funds listed on U.S. stock exchanges without paying a commission. The company also aims to replicate the concept for cryptocurrencies. The reason the company doesn’t charge any fees is that, according to their website, it “was built from the ground up to be as efficient as possible. By cutting out the fat — hundreds of storefront locations, manual account management, expensive Super Bowl ads, etc. — Robinhood is able to maintain a lean bottom-line and pass the savings along to the customer.” Well, and they charge for premium accounts and say they make money from the interest on the cash and securities in Robinhood accounts, though that can’t be easy in the current low interest climate.
An interest example of a commission free digital broker was Loyal3. It’s original business model to let investors buy partial shares for as little as $10 in about 60 companies such as Google, Berkshire Hathaway, Facebook, and Apple. Loyal3 didn’t charge any fees and account setup was free, but as you can tell from the past tense, it wasn’t meant to last. Whether it was because competitors like Robinhood offered bigger ranges of companies to invest in or whether the business model itself without charging any fees from investors at all was simply unsustainable, the company failed in spring last year. From its ashes rose FolioFirst, which seems to try to avoid its predecessor’s mistakes by offering more than 200 stocks and three ETFs as well as charging a monthly fee of $5.
However, to use the words of FinTech thought leader Michael Kitces, “existing incumbents with existing brands can easily leapfrog new entrants” and many traditional brokers have simply added an online brokerage in addition to their original offering. Obviously, the online version is generally cheaper than the traditional accounts, has also some downsides in the form of reduced services etc., but still comes with a fixed cost. It’s the incumbents’ way of dealing with the disruptors. It doesn’t mean it’s wrong; there are upsides to dealing with one or the other, so the choice is yours.
Social Trading
A similar service that is sometimes included under Digital Brokerage as it consists of some of the services is Social Trading. The reason is that it adds to the digital brokerage model the option to let investors replicate the trading of others. These “others” are traders that either have extensive experience or a successful track record or both. The idea is that an investor basically does not need to know much about financial markets, but choose the right trader to follow. It developed from pure social trading networks, which would let its members exchange trading ideas and views without offering the brokerage element though it was a small step from there. The different players in the field offer varying degrees of automation and it depends on the investor how active they want to be. While copy trading refers to automatically copying the trades of the connected trader to the investor’s portfolio, mirror trading focuses more on trading strategies. Darwinex and eToro are two of the biggest names in the sector. They – and some others – also offer services based on fund concepts. For instance, eToro offers investing in its two CopyFunds, which either comprise the best performing and most sustainable traders on the platform or bundle together CFD stocks, commodities or ETFs under one chosen market strategy.
Having its roots in FX trading, Social Trading today is available for most asset classes, from shares to ETFs to commodities to derivatives such as CFDs and Binary options and as its latest edition, Cryptocurrencies.
Micro-Investing
Another way of contributing to your financial planning and build your savings is a trend called Micro-Investing. Such platforms help users save small amounts of money and invest them. By using apps like Stash or Acorns for your smartphone, they aim to simplify investing and make it more accessible. Stash starts with as little as $5, promises to assist you picking an investment strategy and invest in40+ ETFs, and helps their clients to keep learning by providing tips and articles. With Acorns you connect your debit and credit cards and every time you make a purchase, the app rounds up to the nearest dollar and invests the spare change. You can, of course, add additional funds through lump sums or recurring daily, weekly or monthly investments. Both apps charge $1 a month for an account and once it reaches $5,000, the flat fee is switched to 0.25% of the account balance.
While it won’t help you build you a billion-dollar fortune, it’s a good way to start in different ways. Firstly, it creates a savings culture. That means it introduces users to the savings concept in general as most people don’t save regularly or have no savings at all. But even people already stashing money away on a regular basis can learn a thing or two using micro-investing apps. Secondly, as the commercial said “every little helps”; it’s great to make a fortune overnight betting on the right horse, but it’s not the likely way to financial security. Instead, even small amounts can add up. If you started putting $5 a day in a box in your twenties, by the time you retire (in your sixties) you would have about seventy grand, that’s assuming you don’t earn any interest and you don’t lose that box. Now, you figure out what you spend your money for on a daily basis…
Investing Tools & Portfolio Management
And then there would be the group Investing Tools & Portfolio Management that aims to support investors with their financial planning without offering some form of brokering. Pure information platforms like Wikifolio aim to create an independent marketplace where people share their trading ideas in a way that is visible for everyone. Startups like Grisbee provide tools that help investors and financial advisors alike by pooling portfolios and the respective services like analysis, forecasting and portfolio allocation. Personal finance platforms on the other hand like NerdWallet aim to help people make and manage financial decisions by comparing various products available from various banks and insurance companies. Kensho‘s AI-powered platform combs through gorgentous amounts of data that could move securities’ prices and finds correlations between world events and the respective impact on asset prices. No wonder most of the big US banks partner with the company.
This article is part of our FinTech series on the disruption of Financial Services that looks at the different areas, how they have been changed and what the future may hold in store. If you want to know more about FinTech like the 10 Biggest European FinTech Unicorns or the Six game changing FinTech technologies and how they transform financial services, check out our dedicated area here.