The challenge with digital wealth management is to convince people to put their money to use digitally
Robo-advisory is on the fast-track to a new kind of transformation, but the bigger win, according to the Co-founder and CEO of Singapore-headquartered fintech startup StashAway Michele Ferrario, is the burgeoning digital wealth management industry.
Robo-advisory is a type of digital financial product offering algorithm-based, data-backed investment recommendations via online platforms and apps.
Global robo-advisory assets under management (AUM) are closing in on the trillion-dollar mark. With the U.S. leading the way, global AUM for the robo-advisory sector is projected to cross US$987 billion in 2020, with $4,398 average AUM per user.
Growing at 26% annually, this is expected to grow to a staggering $2 trillion by 2024, with robo-advisory services catering to 43 billion users.
StashAway, which focuses on digital wealth management, was founded in 2016, and recently secured $16 million in a Series C round of funding led by Australian venture capital fund Square Peg.
Ferrario believes that the real problem digital wealth management is aiming to solve is that of people not knowing what to do with their savings. Robo-advisory, he says, is just a means to an end.
“My point of view is that that industry is currently way less digital than it should be. And it will be significantly more digital and that is today. So, I think robo-advisory is simply a specific product that plugs into this,” he says.
A fast-growing digital wealth management segment
The robo-advisory market is expected to become a $1.4 trillion industry in this very year. A project report by BCG found that robo-advisors represented $500,000 in average AUM per client, a fourth of that under the broader digital wealth management segment, which had $2 million in average AUM per client.
Ferrario believes that these results are just an inkling of the scope there is for growth in the industry. With global AUM expected to reach $145.4 trillion by 2025, Ferrario believes that robo-advisory will have to expand its applications in the coming years, as online wealth management picks up traction, to capitalize on any opportunities to digitally manage the massive pool of money.
“[With the amount of wealth available globally], if you ask me how much of it would be managed digitally 10 years from now – way more than a trillion,” Ferrario says.
Part of the reason for expecting such a monumental transformation is that financial services are still catching up to the West in some regions, including Asia-Pacific. In Southeast Asia, for instance, over 70% of consumers are unbanked or underbanked.
“What we’re trying to solve is there are a lot of people that save money… but they are either unserved or very badly served by the financial services industry,” he says. “The problem is widespread across the pyramid in different ways.”
“The industry, especially outside of the U.S. and in Asia, has not embraced technology and does not use technology to provide better services at lower costs to customers,” he adds.
This represents a large solutions gap considering that wealth in Asia is expected to record the highest rate of worldwide regional growth in five years, reaching $58.2 trillion at a rate of 9.4% annually, according to a 2019 report.
Ferrario is speaking from the experience of his own company, which started off with what he calls a classic robo-advisory product, offering diversified portfolios across asset classes. However, through conversations with its customers, the company realized that the bigger pain point was that customers did not know what to do with their money.
More specifically, Ferrario observed that people want to make investments that they understand and that work for their unique needs.
“[There is] a clear need, which is to do something with your savings and prepare for the future, which is currently addressed very poorly by non-digital tools,” Ferrario says.
“If you put your money under the pillow, it’s not going to work out, because 30 years down the road when you retire, you’ll find out you have less money than you thought, and this is a problem for everybody,” he explains.
Retirement savings are a growing concern. In one study, 64% of affluent millennials surveyed noted that retirement was the topmost driver pushing them to invest. In this context, digital wealth management platforms help to move latent money and management services from offline to online.
But digitalization is just one half of the solution. The other half is getting people to understand how to use this medium effectively to address their own financial goals.
Understanding finance to understand fintech
Ferrario notes that financial products currently in the market are complex and tricky to understand, which is why he believes that it is important for people to have access to resources that educate them about managing their finances.
“Digital technology is a means to an end, so it’s just a way to solve a problem. But the core is making sure you create the product that is… simple and cost effective to invest intelligently,” he adds.
By giving people both the infrastructure as well as the know-how to make use of such technology, the digital financial services industry will be placed in a better position to grow. In StashAway’s own experience, Ferrario notes that as more users learn how the financial products on the platform work, they incrementally increase their time spent on the platform.
“Moving money is always a difficult thing to do,” he says. “We are asking clients to trust us with their retirement savings and therefore, it takes time to get there.”
But once they do, Ferrario adds, users tend to become ambassadors for the company’s products.
“That creates a virtuous circle that helps the growth of it. And I’m talking about StashAway, but this is true for the whole industry,” he says.
Subsequently, Ferrario believes that successful companies in the robo-advisory segment will over time expand their range of offerings to enable their clients to reach a variety of financial goals.
At the same time, he cautions, “[It] means becoming a supermarket, it doesn’t mean [doing] everything. I think that curation is still a big part of, at least, our way of interpreting what we do.”
What worked for StashAway
The approach seems to be working well for StashAway, which recently opened offices in Thailand, Hong Kong and the U.A.E. in addition to its offices in Singapore and Malaysia.
Ferrario attributes the company’s success to its product-market fit, validated by the traction that the company has seen in Singapore and Malaysia.
“[We have a] conviction that the problems that we have found, and are addressing in Singapore and Malaysia, are also widespread in a number of other countries,” Ferrario says.
“We are considered the leader in the market in Singapore and Malaysia, not just because we are by far the largest player but also because we have been the first one to get the license, the first one to launch the product, the first ones to launch cash management product and so on…” he elaborates.
Moreover, having raised $36.4 million in funding so far, Ferrario notes that StashAway also has a strong balance sheet position that can drive international expansion. In addition to tapping into other green pastures, the company also aims to expand its product offerings for its customers.
“I think it is just the question of continuing to be innovative, continuing to talk to our clients and find ways to improve our offering and solve more problems,” Ferrario notes.
The backbone of this whole operation lies in the technology. Robo-advisory and its parent branch of digital wealth management relies heavily not only on algorithmic backing, but also on platform support.
Ferrario notes that as a fintech company, StashAway focuses heavily on technology driven by its team. Apart from Co-founder and CTO Nino Ulsamer, who has 15 years of experience with Internet companies, 50% of StashAway’s payroll comprises tech roles.
“We are the only ones, in Singapore at least, that have a proper app. I know this is a very low bar, but I don’t think there is anybody else who has a proper app,” Ferrario notes.
The argument for an app is a strong one, quite obviously because it is a building block for all successful Internet companies, including fintechs, today.
Consumers have grown to expect a digital and mobile-first experience when it comes to financial advisory, but firms are lagging behind. In order to defend their market share, companies will need to invest in product innovation and advanced analytics, as well as digital tools and a platform to tie it all together.
But technology is a goalpost. 57% of wealth managers tend not to know if their customers are satisfied with their digital capabilities. Companies will only be able to realize the scope of and need for innovation by keeping a ear to the ground, and deciphering what consumers really want.
Indeed, robo-advisory, far from being widely hailed as a game-changer in its nascency, has now become only the second-biggest disruptor to the wealth management industry. The first is a new generation of investors who approach wealth management in radically different ways from the old guard.
In order to truly innovate within digital wealth management, therefore, what it takes is not only the technology, but a leadership that is willing to re-envision how wealth is managed in the digital age.
Header image courtesy of StashAway
