Consolidations projected as wealthtech investment remains soft

As one of the younger areas of fintech, wealthtech started to see a slowdown in investment in 2019 as investors focused more on late-stage companies and safe bets. This trend continued in H1’20 due to the global impact of COVID-19, although investment is trending upward year-over-year, due, in part, to a US$135 million raise by US-based Aspiration.

Wealth managers rethinking operating models in wake of COVID-19

COVID-19 has moved technology to the top of the agenda for many wealth managers given their sudden inability to do work traditionally. They’ve had to very quickly rethink their business models and find ways to do what they have done for decades using technology. While investment will likely remain soft for the remainder of 2020, the enhanced focus on wealthtech will likely revitalize the space in 2021. 

Total global investment activity in Wealthtech: chart

COVID-19 has really put into sharp relief the operating costs of the wealth management business and everyone has learned that you can’t simply run a business from sitting at home. This has really amped up the technology agenda for established wealth management companies to find better ways of doing what they have done for decades but with technology. This is going to revitalize the sector long-term.

Bill Packman
Partner and Wealth and Asset Management Consulting Lead
KPMG in the UK

Robo-advisory getting a second lease on life

Over the past 12 months, robo-advisory lost some of its shine as investors realized the long-term nature of the play. The space is starting to get a second lease on life, however, due to decreasing interest rates and an increasing appetite by individuals to invest themselves rather than suffer the cost of traditional approaches while getting average returns. This shift has highlighted the validity of the business model and helped to enhance management and investor confidence. The main challenge for robo-advisory firms will likely revolve around managing through the next 3 to 5 years or more that it will take to be seen as mature businesses. 

Consolidations could come by year-end

Consolidations are expected in the wealthtech space either through consolidating books of business for companies that do not have the working capital needed to sustain them, or through the forging of big partnerships in order to drive economies of scale. As equity backers balk at the timeframes required to get high growth but low-margin businesses to profit, they will likely look for opportunities to liquidate or divest some investments. This is likely to prompt established wealth managers and banks to make deals in order to grow or expand their own lines of business.

Trends to watch for in wealthtech

Heading into H2’20, there will likely be an increase in opportunistic deals as wealthtechs with inherently good technologies struggle.

Over the medium term, there will likely be more investment in the less glamorous areas of wealthtech as traditional wealth managers look to improve their back and middle offices.