Economy
Online wealth management on the rise
Financial technology/IT startups, called FinTech (Financial Technology) for short, are taking submarkets from traditional financial institutions practically overnight. In an analysis published in March, the stock analysts of Goldman Sachs estimated that USD 4.7 billion of the financial institutions’ income is endangered by technology companies stealing their thunder. With their revolutionary ideas and solutions, FinTech startups are sometimes able to radically change the functioning of the financial sector, including payment, credit and insurance activities, and the same goes for wealth management. We hereby present some of the most revolutionary companies active in the latter field below.
Motif Investing
Motif Investing is an online financial advisory and brokerage firm that creates completely unique, customized investment portfolios for their clients, for which the latter do not have to be financial geniuses. Instead of investing the clients’ money according to investments strategies, earlier yields or special asset classes, they prepare an investment portfolio based on a topic chosen by the client, which may even be utterly mundane.
In practice, this means that the client comes up with an idea or topic, for example they put their trust in the future of robotics, and would therefore like to invest in companies active in this field. Motif Investing prepares a portfolio of no more than 30 components (shares, bonds, ETF), weighted according to the client’s idea. The client may change the weights as they wish, remove components from the portfolio or add new ones.
When the first portfolio is ready, the client invests as much money as they want, with a minimum of USD 250, while the one-time transaction fee is USD 9.95. If they later want to make changes to the portfolio, it will cost them USD 4.95 per component. The low entry barrier targets small investors, unlike in the case of large wealth management companies.
The service provided by the company, founded in 2010, is also popular because investment is packaged as a community experience. Clients may share with each other what kind of thematic portfolio, or “motif", they created, and they may discuss each other’s strategies. The unique investment portfolios created by clients may also be used by others, and the original inventor receives a prize for that.
“Our experts holding a PhD took six months to come up with 120 professional motifs, while our clients prepared 35,000 during the same period. This is the strength of our model", said Hardeep Walia, co-founder and present chief of Motif, in an interview.
Motif has so far garnered USD 126.5 million in six rounds of funding from venture capital investors; Goldman Sachs and JP Morgan were among those who got on board. The company, founded in the U.S., is now expanding abroad, and they are also developing an automated advisory software that will help investors and advisers improve the weighting of their portfolios free of charge. The motifs can also be tracked via a mobile app or using Apple Watch.
Betterment and Wealthfront
Betterment, a service dreamed up in 2008 by former Harvard student Jon Stein, and Wealthfront, a very similar service that launched in 2011, have burst into the field of online financial services. These firms have created algorithms and online platforms that commission “robot advisers" to prepare investment portfolios for clients.
Since its foundation, Betterment drew in USD 105 million in venture capital for its functioning, while Wealthfront attracted USD 129.5 million. The former has 90,000 clients and USD 2 billion in managed assets, while the latter manages USD 2.4 million, which means these are no small-scale players.
The basic idea behind both companies is that the client answers a series of questions to determine how much risk they are willing to take, and based on these answers, the program will tell them how to obtain the highest yield, all this at a fraction of the commissions and fees charged by traditional financial advisors.
The algorithms compile a portfolio of ETFs (exchange-traded funds), in which the weighting of the individual ETFs, which are primarily following the major indices, are based on the data provided by the client. Clients do not choose from shares, indices, or bonds; the only difference between two client portfolios is the weighting of ETFs according to the set parameters. Automated portfolio creation saves the generally steep fee of traditional investment consultation, which is why these companies can work for extremely competitive fees.
Betterment and Wealthfront are also very efficient at managing money from a taxation point of view. They accomplish this by closing losing positions after a certain period and then reopening these with the same capital (which only works if they enter into transactions at a low fee). The client will thus have a tax-deductible loss on the closed position, while the amount of invested capital is unaffected by the closing and reopening.
The same position may turn to being profitable, and tax must be paid on capital gains, but the tax advantage realized at the closed losing position can be deducted; as a result, the real yield of investments can be increased significantly through tax optimization. This, of course, is just one example among many of how these companies can legitimately decrease clients’ tax obligations.
Personal Capital
Personal Capital offers an advanced PFM (personal finance management) software, adding an online wealth management service on top of it.
The company has more than 700,000 clients who are tracking USD 150 billion worth of assets through their software, and it manages more than USD 1 billion directly.
Personal Capital has obtained USD 104.3 million in venture capital for its growth since it was founded in 2009. One of the founders, Bill Harris, had also worked as CEO for PayPal and Intuit. The company only assists premium and private clients with their wealth management, since the base entry barrier was set at a wealth of USD 100,000, and to become a private client one has to have more than USD 1 million. On the other hand, they offer their online account tracking service free of charge. The company works for a fee of 0.49-0.89 percent.
Using the PFM software, clients may track their accounts held at various institutions online, via an app. This practically allows them to see the full picture regarding how much income they have, how much they spend and on what, and how their investments are doing, while they can also see the previously hidden costs (e.g. account management fees, transaction fees, etc.)
The wealth management process is as follows: the client submits their data online, then the personal advisor contacts them online and helps both with creating the investment strategy and, which is also very important, with optimizing tax payments. The fact that accounts are linked to the software makes the advisors’ work easier as well, since they can find tax optimization opportunities more readily than would be possible if they only saw a fraction of the client’s transactions and accounts.
What is the situation in Hungary?
The above players are not yet present in Hungary, partly due to the fact that the market is too small. It is a global trend, however, that young people, and even those in their thirties or forties, trust technology firms or services more than they trust banks.
Meanwhile, the decreasing profit margin in the private banking sector will certainly prompt the main European players to build technology-based “robot" or “self-advisory" platforms. The business development manager of Dorsum, Imre Rokob thinks that there would be a demand for such services.
Essentially, the solution is not a fully online wealth management system, but a hybrid that combines personal customized consultation with that occurring through online channels. There would surely be a demand, since after the investment decisions, the performance of the new portfolio could be tracked on a handheld smart device, which is practically a prerequisite for today’s clients living in the digital era.
Studies show that the number one fear of traditional European private banking service providers is the advance of online wealth management companies. Just as Hungarians can and do open online accounts at foreign discount brokers and forex trading companies, it is only a matter of time before online wealth management companies also appear.
Dorsum already has solutions in place that offer a high-level digital user experience for clients and advisors in various phases of the wealth management service. “We offer solutions for financial institutions that want to cater to wealthy clients ranging from the interactive client acquisition module to the online 360-degree portfolio overview, and while developing our products we will focus on the field of new-generation digital wealth management in the future as well," Rokob added.
Motif Investing
Motif Investing is an online financial advisory and brokerage firm that creates completely unique, customized investment portfolios for their clients, for which the latter do not have to be financial geniuses. Instead of investing the clients’ money according to investments strategies, earlier yields or special asset classes, they prepare an investment portfolio based on a topic chosen by the client, which may even be utterly mundane.
In practice, this means that the client comes up with an idea or topic, for example they put their trust in the future of robotics, and would therefore like to invest in companies active in this field. Motif Investing prepares a portfolio of no more than 30 components (shares, bonds, ETF), weighted according to the client’s idea. The client may change the weights as they wish, remove components from the portfolio or add new ones.
When the first portfolio is ready, the client invests as much money as they want, with a minimum of USD 250, while the one-time transaction fee is USD 9.95. If they later want to make changes to the portfolio, it will cost them USD 4.95 per component. The low entry barrier targets small investors, unlike in the case of large wealth management companies.
The service provided by the company, founded in 2010, is also popular because investment is packaged as a community experience. Clients may share with each other what kind of thematic portfolio, or “motif", they created, and they may discuss each other’s strategies. The unique investment portfolios created by clients may also be used by others, and the original inventor receives a prize for that.
“Our experts holding a PhD took six months to come up with 120 professional motifs, while our clients prepared 35,000 during the same period. This is the strength of our model", said Hardeep Walia, co-founder and present chief of Motif, in an interview.
Motif has so far garnered USD 126.5 million in six rounds of funding from venture capital investors; Goldman Sachs and JP Morgan were among those who got on board. The company, founded in the U.S., is now expanding abroad, and they are also developing an automated advisory software that will help investors and advisers improve the weighting of their portfolios free of charge. The motifs can also be tracked via a mobile app or using Apple Watch.
Betterment and Wealthfront
Betterment, a service dreamed up in 2008 by former Harvard student Jon Stein, and Wealthfront, a very similar service that launched in 2011, have burst into the field of online financial services. These firms have created algorithms and online platforms that commission “robot advisers" to prepare investment portfolios for clients.
Since its foundation, Betterment drew in USD 105 million in venture capital for its functioning, while Wealthfront attracted USD 129.5 million. The former has 90,000 clients and USD 2 billion in managed assets, while the latter manages USD 2.4 million, which means these are no small-scale players.
The basic idea behind both companies is that the client answers a series of questions to determine how much risk they are willing to take, and based on these answers, the program will tell them how to obtain the highest yield, all this at a fraction of the commissions and fees charged by traditional financial advisors.
The algorithms compile a portfolio of ETFs (exchange-traded funds), in which the weighting of the individual ETFs, which are primarily following the major indices, are based on the data provided by the client. Clients do not choose from shares, indices, or bonds; the only difference between two client portfolios is the weighting of ETFs according to the set parameters. Automated portfolio creation saves the generally steep fee of traditional investment consultation, which is why these companies can work for extremely competitive fees.
Betterment and Wealthfront are also very efficient at managing money from a taxation point of view. They accomplish this by closing losing positions after a certain period and then reopening these with the same capital (which only works if they enter into transactions at a low fee). The client will thus have a tax-deductible loss on the closed position, while the amount of invested capital is unaffected by the closing and reopening.
The same position may turn to being profitable, and tax must be paid on capital gains, but the tax advantage realized at the closed losing position can be deducted; as a result, the real yield of investments can be increased significantly through tax optimization. This, of course, is just one example among many of how these companies can legitimately decrease clients’ tax obligations.
Personal Capital
Personal Capital offers an advanced PFM (personal finance management) software, adding an online wealth management service on top of it.
The company has more than 700,000 clients who are tracking USD 150 billion worth of assets through their software, and it manages more than USD 1 billion directly.
Personal Capital has obtained USD 104.3 million in venture capital for its growth since it was founded in 2009. One of the founders, Bill Harris, had also worked as CEO for PayPal and Intuit. The company only assists premium and private clients with their wealth management, since the base entry barrier was set at a wealth of USD 100,000, and to become a private client one has to have more than USD 1 million. On the other hand, they offer their online account tracking service free of charge. The company works for a fee of 0.49-0.89 percent.
Using the PFM software, clients may track their accounts held at various institutions online, via an app. This practically allows them to see the full picture regarding how much income they have, how much they spend and on what, and how their investments are doing, while they can also see the previously hidden costs (e.g. account management fees, transaction fees, etc.)
The wealth management process is as follows: the client submits their data online, then the personal advisor contacts them online and helps both with creating the investment strategy and, which is also very important, with optimizing tax payments. The fact that accounts are linked to the software makes the advisors’ work easier as well, since they can find tax optimization opportunities more readily than would be possible if they only saw a fraction of the client’s transactions and accounts.
What is the situation in Hungary?
The above players are not yet present in Hungary, partly due to the fact that the market is too small. It is a global trend, however, that young people, and even those in their thirties or forties, trust technology firms or services more than they trust banks.
Meanwhile, the decreasing profit margin in the private banking sector will certainly prompt the main European players to build technology-based “robot" or “self-advisory" platforms. The business development manager of Dorsum, Imre Rokob thinks that there would be a demand for such services.
Essentially, the solution is not a fully online wealth management system, but a hybrid that combines personal customized consultation with that occurring through online channels. There would surely be a demand, since after the investment decisions, the performance of the new portfolio could be tracked on a handheld smart device, which is practically a prerequisite for today’s clients living in the digital era.
Studies show that the number one fear of traditional European private banking service providers is the advance of online wealth management companies. Just as Hungarians can and do open online accounts at foreign discount brokers and forex trading companies, it is only a matter of time before online wealth management companies also appear.
Dorsum already has solutions in place that offer a high-level digital user experience for clients and advisors in various phases of the wealth management service. “We offer solutions for financial institutions that want to cater to wealthy clients ranging from the interactive client acquisition module to the online 360-degree portfolio overview, and while developing our products we will focus on the field of new-generation digital wealth management in the future as well," Rokob added.
