Wealth managers are promising business-class service for the masses

LINDA, A 54-YEAR-OLD event consultant in Los Angeles, is neither disorganised nor innumerate. Ask about her finances, however, and you lose her for two hours. She opens her current (checking) account on a mobile app, then cites a rainy-day fund at another bank. She has 14 credit cards, five mortgages, six insurance policies and several pensions with ex-employers.

Ranks of pinstriped advisers have long helped the very rich to invest, minimise tax and pass money down the generations. Everyone else has had to work it out on their own. “People’s relationship with money is broken,” says Martin Gronemann of ReD Associates, which uses anthropology to advise businesses. It reckons that personal finances are a bigger source of stress than worries about crime or health.

Now, however, financial firms are competing to democratise wealth management. On December 8th Goldman Sachs, which used to shun clients with less than $ 25m, said its robo-adviser could soon serve clients with as little as $ 5,000 to invest. And on December 14th Vanguard, an asset manager with nearly $ 6trn under management, teamed up with Alipay, a Chinese tech giant, to counsel customers with at least 800 yuan ($ 114).

The wealth-management sector is fragmented and ripe for disruption. UBS, the global leader, has a 3% market share and is the only firm in the top four in each of Europe, Asia and America. The industry remains technophobic, says Charlotte Ransom, a Goldman Sachs veteran now at Netwealth, a challenger. Advisers spend half their time on tasks that could be automated. According to EY, a consultancy, only 56% of clients fully understand the fees they pay.

The industry stratifies customers in a manner rather similar to airlines. “Affluent” clients, with between $ 300,000 and $ 1m in assets, get premium-economy treatment. They may talk to advisers by phone, but banks will do all they can to keep them out of branches. Investment options are limited to ready-made funds. “High-net-worth” clients, with up to $ 15m, fly business class, picking stocks and chatting in person with named advisers. Flying private are the “ultra-high-net-worth” individuals, who have access to venture capital and currency hedges, with exclusive dinners, golf outings and so on as cherries on top.

Whereas high-net-worth individuals typically pay no more than 1% of assets in fees each year, the mass affluent often pay over 2%—the average yield of S&P 500 stocks—for inferior service. Cattle class gets no service at all. Saving for retirement is the second-biggest financial commitment most adults ever make (after buying a home), says James McManus of Nutmeg, a British fintech. Yet most do it with no help.

That leaves a lot of money on the table. According to Oliver Wyman, a banking consultancy, the affluent, with $ 21trn in assets, and those below them, with $ 51trn, have as much to invest between them as high-net-worth individuals. The problem is that advisers, branches and time are costly. Most private banks deem portfolios below $ 2m barely profitable.

Yet three factors are conspiring to bring that figure down. The first is technology. In 2001 Credit Suisse tried to go budget with a pan-European online network. But the cost quintupled to €500m ($ 447m), in part because it relied on huge servers. Today data are in the cloud, and firms can bolt on apps instead of coding everything.

Second, the top of the pyramid is getting crowded. Banks love wealth management, with its high returns and low need for capital. As they have all tried to expand their high-net-worth offerings, competition has squeezed margins. The market value of a panel of 100-odd wealth managers has dropped by 15% in the last year, using Bloomberg data.

Third, negative interest rates are eroding the money held by the masses, about half of which is in cash deposits. So clients are crying for help.

That has sparked a race between banks, fintechs and investment firms. Wealth managers need several strengths to succeed, says Matthias Memminger of Bain, a consultancy: technology, trusted brands, marketing dollars and a human touch. Private banks have the last three, but score poorly on IT. They also fear cannibalising their high-net-worth business. UBS shut its robo-adviser in 2018, a year after launch. Investec, a bank, folded its own in May.

Startups have the opposite profile. Their robo-advisers generate recommendations by asking simple questions, keeping fees down. They allow customers to buy fractions of shares, and net out orders to reduce trading costs. But their brands are weaker, so acquiring customers costs more. And clients entrust them with only smallish sums. Launched in 2011, Nutmeg manages just £1.9bn ($ 2.5bn), and Wealthfront, a decade-old American firm, $ 22bn.

Brokers and asset managers also have good technology, which they use to compile data and execute trades. They pile clients’ money into cheap exchange-traded funds and have cut fees to rock-bottom, hoping to cross-sell premium products. Charles Schwab’s robo-adviser manages $ 41bn; Vanguard’s, $ 140bn. But their expertise lies in manufacturing investment products, not distributing them. They help people pursue single investment goals, not plan their financial life.

To tick all the boxes, contenders are combining forces. In May Goldman Sachs paid $ 750m for United Capital, a tech-savvy manager. It has also invested in Nutmeg. BlackRock has backed Scalable Capital, a digital service whose robo-adviser is used by banks including ING and Santander. Insurers are jumping in, too. Nucoro, a fintech, recently said that it would power Swiss Risk & Care. Allianz has tied up with Moneyfarm, a British robo-adviser.

The logical endpoint is financial platforms—perhaps super-apps that sit on smartphones—which would let customers stitch their patchwork of financial products back together. But the model has not yet been tested by rough economic weather. Volatility makes financial clients prize human contact, says Christian Edelmann of Oliver Wyman. The consultancy reckons the average cost-to-income ratio for the biggest wealth managers would jump from 77% to 91% in a recession. It remains to be seen how well mass-market wealth managers will perform in a downturn. ■