Throughout its history, finance follows a predictable pattern. Waves of excessive risk-taking are followed by the three common corrections: a flight to safety, regulatory scrutiny, and jail time for the worst offenders. The junk bond market imploded along those three familiar lines in the late 1980s. Ditto for the 2008 financial crisis. 

In 2021, a 10-year wave of fintech innovation and disruption culminated in a $1.3T market cap for public companies listed in the F-Prime Fintech Index. Then, in 2022, the market fell back to Earth and the usual corrective results followed in 2023. In their flight to safety, investors abruptly demanded capital efficient growth and cut fintech valuation multiples. By now we could fill a school bus with the fintech executives who are either under indictment, awaiting charges, or already in jail, including leaders at FTX, Bitwise, Frank, Wirecard, Terraform, and Binance. And in the last 12 months, regulators have finally started to throw their weight around the fintech sector. In our most recent State of Fintech report, my partners and I refer to 2023 as the year of “reg on, risk off.” 

For now, we wanted to take a look at the more enduring element of any corrective cycle: regulatory action. The fintech industry experienced a meaningful shift in regulator scrutiny, rule-making, and enforcement in 2023, which will have a lasting impact on the sector. 

Banking
The Office of the Comptroller of the Currency (OCC) has is scrutinizing the relationships between fintech startups, banking-as-a-service providers (BaaS), and chartered banks. This triad has been incredible valuable to the fintech ecosystem, but banks like Blue Ridge Bank, Cross River Bank, and First Fed Bank have recently found themselves in the regulatory crosshairs. Many banks are responding by suspending fintech startup programs, re-asserting stricter compliance controls, or exiting the space altogether. It’s clear to us that regulators would prefer chartered banks bypass BaaS providers and manage fintech programs directly. We think BaaS and embedded banking is here to stay, but it will become more expensive and everyone is moving more slowly until the regulatory guardrails solidify. 

The Consumer Financial Protection Bureau (CFPB) has been busy making headlines with proposals to cap overdraft and not-sufficient-funds fees. While in aggregate these will not make a big impact on the banking industry, we think it’s a fascinating culmination of neobank disruption which taught consumers (and apparently regulators) that banking could function without the fees. 

In the realm of open finance, the CFPB proposed Section 1033 of the Dodd-Frank Act enshrining consumer access to their financial data with banks (though notably not yet with brokerages). Thanks to aggregators like Plaid, Quovo, and Yodlee, the US has had de facto open access for years, but it is good to see it protected, though we’re watching for unintended consequences if new limits are placed on secondary use of the data.

Payments
FedNow, and the renewed push for real-time payments (RTP) in the US, is a big story, though the lack of deadlines or forced bank support ensures we will see much slower adoption in the US than in countries like Brazil and India. Of course, there are many other reasons the US would have adopted more slowly, like credit card rewards and already high-performing alternative payments rails. 

We are focused on how risk and fraud will be addressed with RTP, and see increased scrutiny of other digital wallet transactions as a preview. Fed Reg E does not require banks to reimburse consumers who mistakenly send funds through error or fraud, yet the CFPB is understandably looking at the $1 trillion of digital wallet transactions and asking if they should. Bowing to pressure, last year Zelle voluntarily began reimbursing some affected consumers, and we believe we will eventually get to a greater harmonization of consumer protections regardless of the payment rails.

Finally, it wouldn’t be a year without someone complaining about interchange, though last year the Federal Reserve actually proposed a debit card interchange fee reduction that would be the first since 2011. As before, fintech companies could side-step the lower fees by working with exempt banks under the Durbin Amendment to the Dodd-Frank Act (banks with less than $10B in assets.)

Lending
Seems like everyone is asking how to regulate By Now Pay Later (BNPL). In the OCC’s December bulletin, the regulator issued new requirements for banks that support BNPL transactions around risk management, disclosure guidelines, and borrower safeguards. The CFPB issued its own report focused on similar issues. And following Callifornia’s lead that formally incorporated BNPL under state lending laws in 2020, many states are addressing BNPL this year. We expect BNPL to gradually align with other consumer lending regulations, but this will not materially slow its rapid growth.

Across the country, states are passing or considering legislation dealing with early wage access (EWA), where hourly workers can smooth out pay cycles by accessing their wages without waiting for weekly or monthly pay cycles. Nevada and Missouri adopted laws that protect users from large fees when using EWA, while a law in Connecticut (and another pending approval in California) would designate EWA as a “loan.” 

Wealth and Asset Management
In March, the Department of Labor urged retirement fund providers to “exercise extreme care” when considering an investment in cryptocurrency, opting for statements over regulation for now. 

More regulation is coming for the private funds industry (aka Alternatives) with a notable step in that direction in 2023. At $16T in assets and an expanding base of retail investors, the Securities and Exchange Commission (SEC) began requiring registered advisors to make quarterly disclosures about their fees, as well as performance and potential conflicts of interest.  

Proptech
While more litigation than regulation, in October, a federal jury found that the National Association of Realtors had colluded with some of the largest real estate brokers in the US to inflate commissions. The ruling had immediate implications for property tech companies like Redfin, Zillow, and Opendoor, which all saw their stock price sink in the aftermath. It is remarkable that US consumers continue to pay such high commissions for selling a home, but it remains to be seen whether this ruling can do what Redfin and a decade of digitization has not.  

Crypto
Several jurisdictions, including the European Union, released detailed crypto regulatory frameworks seeking to prevent fraud, money laundering, and other forms of illegal financing via cryptocurrency. Here in the US, the SEC is continuing its policy of “regulation via litigation,” filing roughly 55 enforcement lawsuits during Chairman Gensler’s term at the agency’s helm. And in a huge milestone for the crypto sector, the SEC also approved the listing of 11 bitcoin ETFs. 

Conclusion
Heightened regulation follows waves of innovation and increased risk-taking, and that’s generally a good thing. The lag permitted a decade of new startups to innovate, expand consumer options, and further digitize the financial industry. 2023 marked the beginning of the “reg on, risk off” era, and while regulation may go too far as well, we think the increased regulatory scrutiny will prove beneficial. We must all work with regulators to develop regulation that protects consumers while permitting innovation, gives businesses clear rules to comply with, and if not too much to ask, harmonizes disparate regulatory frameworks across analogous products (e.g., payment rails) and across federal and state regimes.

 

Check out our full State of Fintech report here.

Financial APIs are driving an overdue wave of innovation.

Over the last few years, open finance has become one of those vaguely defined fintech buzzwords. But with increasing regulatory movement in the US and nearly 70 million consumer accounts now interacting with financial APIs, it has become more relevant than ever.

Open finance has its roots in open banking, which refers to the use of application programming interfaces (APIs) to build applications fueled with consumer banking data. While largely invisible to consumers, open banking innovation has powered the novel ways that consumers now borrow, build wealth, and move money. The shift towards open banking has long been underway in the US and has paved the way for new open finance applications to flourish.

We define open finance similarly to open banking, but more broadly: the use of APIs to build applications that supplement consumer banking data with other information, defining users’ financial lives across their profiles of wealth, debt, insurance, sources of income, and more. The reason that open banking regulation is so exciting is that it’s the first step towards a world of open finance, where consumers can more fairly access financial products designed for their unique needs.

A Brief History of Open Finance

One might trace the origins of open banking in the US back to 1997, when Microsoft, Intuit, and CheckFree formed a combined open API standard known as the Open Financial Exchange (OFX). But open banking really started to catch on post-Great Financial Crisis when the US government enacted Dodd-Frank and created the Consumer Financial Protection Bureau (CFPB).

Now, after more than a decade, Section 1033 of Dodd-Frank — referring to consumers’ right to access their own financial data — has taken the main stage. In October 2023, the CFPB proposed the Personal Financial Data Rights rule. If it’s finalized in the fall of 2024 as anticipated, the rule would implement Section 1033 and codify open banking in the US.

The Rise of Financial APIs

A key driver in the adoption of open finance is the proliferation of financial APIs, and their superiority over earlier screen scraping technology. Drawbacks to screen scraping include connectivity issues any time a website experiences an update or outage, and heightened risk for financial institutions who are unaware who is scraping their consumer data and for what purpose. Instead, APIs dictate how systems can securely and efficiently exchange discrete data elements — and are the key enabling technology for open finance.

The adoption of APIs in financial services has accelerated over the last few years, as institutions have come to realize the heightened security, efficiency, and customer experience associated with them. At the same time, recent CFPB proposals are continuing to shepherd financial institutions toward a world of open APIs, enabling consumers to easily port financial data between providers. The Financial Data Exchange (FDX) emerged as an industry group whose open API standard incumbents and fintechs alike have rallied around. It is estimated that the FDX API now touches 65 million consumer accounts, up from 2 million just four years ago.

The Evolution of Bank Cooperation

The 2000s and 2010s saw a substantial debate over the right to access consumer financial data. At the time, data holders (namely banks and other incumbent institutions) cited IT costs imposed by data aggregators scraping their websites, while data users (like fintech applications) asserted that they were merely accessing consumer-permissioned personal data to better serve the end user.

Case in point: For several days in 2015, J.P. Morgan and Wells Fargo restricted customers of Mint (a then-popular, now-sunsetted account aggregator) from accessing their bank account information. Banks pointed to technical concerns such as data security and server capacity, though competitive threats loomed too. Even when institutions didn’t fully restrict access, they had other tactics at the ready: strict security standards, time-of-day restrictions, increasingly granular user permissioning, and costs for access.

Flash forward to today: Incumbents have come around to the promise of open finance as the technical advantages of APIs — and their customer experience improvements — have become more apparent. Disruptors and incumbents are increasingly collaborating here, too: members of the industry group FDX include a healthy mix of incumbents (like Bank of America and Wells Fargo) and disruptors (like Plaid and MX).

API technology, regulatory encouragement, and shifting consumer preferences are all fuelling a wave of new open finance startups. So what would it look like if the promise of open finance were fully realized?

Open Finance in Action

Many users already feel the benefits of linking their bank accounts with popular financial applications like Venmo, Coinbase, and Robinhood via Plaid. However, at F-Prime we imagine that same level of data access expanding to other areas of a user’s financial life.

A large population of consumers still don’t have fair access to credit. Lenders can use payroll API solutions like Argyle to verify sources of income or solutions like Trigo to validate a customer’s ability to pay rent on time. Financial institutions can use Method to aggregate a consumer’s outstanding liabilities and reveal where they can refinance at a lower price, or employers can use it to offer debt repayment benefits to their employees. In the insurance space, Canopy Connect can help agents surface existing insurance policies and help potential customers dig for more competitive options.

This wave of consumer financial data aggregators will leave institutions and fintechs looking for an “aggregator of aggregators” solution, either routing between providers to maximize uptime or to paint a more accurate financial picture of the consumers they serve. Meld is one example. Others, like Prism and Pave, take consumer data via these APIs and produce financial insights in pursuit of a more modern and comprehensive credit score.

Looking Ahead

It will be a while before that vision becomes reality — 1033 is still directional sentiment, not regulatory action just yet. The proposed rule also only covers a subset of consumer financial accounts: deposit accounts, credit cards, and digital wallets. It says nothing about payroll data, for example. Meanwhile, the thousands of regional banks, credit unions, and other smaller financial institutions that make up the United States’ uniquely fragmented banking landscape will struggle to keep up with the required technological standards.

That said, in the long term we can see the growing array of consumer financial data APIs coming together to a holistic, real-time, and accurate financial identity for every consumer. Easy access to financial services and more tailored financial products will result. We are excited to see the institutional response to the new regulations and technology currently impacting the market — but we are much more excited about the effect that open finance will have on the end user experience for millions of Americans.

 

Originally published on Fintech Prime Time.

Assessing the industry’s rebound

For the fintech industry, it has been a wild couple of years. 2021 was a year of record-breaking valuations, revenue multiples, and VC funding. We then experienced an over-correction in 2022, with massive drops in valuations and multiples, and investors differentiating truly disruptive fintechs from those that merely provided a slightly better version of an existing financial service.

Access the full 2024 State of Fintech report here. 

The F-Prime Fintech Index reflected this rise and fall. In 2021, we measured public fintech companies’ market cap at $1.3T. By the time it found its floor the following year, the industry was worth $389B.

Now, heading into 2024, we see the fintech market in the midst of a rebound, with public valuations and multiples improving as investors prioritize profitable, sustainable growth. By the end of December, the F-Prime Fintech Index’s market cap stood at $573B. Overall, the Index rebounded 114 percent in 2023, and continues to outperform the S&P 500 by 540 percentage points. Revenue multiples have also made a modest recovery, though public investors are rewarding capital efficient growth and structurally attractive gross margins over revenue growth.

Correction Still Rippling Through Private Markets

While the public markets are in recovery mode, the over-correction of 2022 is still affecting private markets. We saw investment volume drop by around 50 percent last year to 1,639. However, it’s worth noting that more private investments were closed in 2023 than every year in history before 2019. Fintech has become one of the largest sectors in venture capital, and that is not changing.

Post-Series B valuations took the biggest hit in 2022 and while they climbed slightly in 2023, it is misleading because only the strongest companies raised in 2023. Those that could wait, did, and tried to grow into prior round valuations. 30-40 percent discounts in secondary trading are a leading indicator of 2024 valuations for some late-stage private companies.

2024 will be a tale of two cities, with high-performing companies continuing to raise without difficulty, while others struggle. Of the 819 companies that raised a Series A round in 2021, 43 percent — more than 350 — have not yet announced a Series B, acquisition, bridge round, or shutdown. Bridge rounds can only extend so far and most will need to raise or find a suitable landing in 2024.

 

M&A Activity Did Not Bounce Back

2023’s $98B in fintech M&A pales in comparison to 2021’s $349B. While we expected heightened activity from private equity and strategic buyers in 2023, the first half of 2023 was extremely quiet. High interest rates hampered PE borrowing patterns, scaled fintech companies lost their high multiple acquisition currency, and strategic acquirers were focused on reducing their operational expenses. The collapse of Silicon Valley Bank helped no one. However, the second half of 2023 M&A was brisk and portends a more vibrant 2024.

 

Reg On, Risk Off

Throughout the history of finance, waves of excessive risk-taking tend to usher in an era of regulatory scrutiny — think of the 1980s junk bond market and the 2008 financial crisis, for example. Having reached the “excessive risk” period in 2021, fintech has now entered a period of regulation.

Relationships between BaaS providers and charter banks are under scrutiny, as are private fund managers and retirement products that include cryptocurrency. Financial service providers are being urged to adopt risk management practices around its buy now, pay later products, and there is downward pressure on debit interchange fees. These are just some of the regulatory actions that impacted fintech this year — check out the report for a full list of the most important pieces of regulation we’re watching heading into 2024.

Reflecting on a Decade in Fintech Innovation

A decade into the fintech era, it is becoming clear where startups have disrupted existing financial services and where they were outmaneuvered or outlasted by incumbents.

Startup-led innovations like software-based payments (Stripe, Toast, Flywire), BNPL (Affirm, Klarna), and commission-free trading (Robinhood) genuinely disrupted incumbents and meaningfully shifted business models, revenue streams, and customer expectations. Elsewhere, incumbents embraced the very innovations startups introduced, leading to broad industry adoption more than disruption. For example, mobile banking and consumer-permissioned API access to financial data are now the norm.

In some sectors, incumbents “found innovation before startups found distribution.” For example, Betterment and Wealthfront pioneered robo-advisors, yet incumbents now control 80 percent of the market.

We should verbalize what you’re reading between the lines here: fintech startups have changed the industry in countless ways, but financial services incumbents are doing just fine. The top five banks have added $580B in market cap since 2003, and the top brokerages added $5.8T in client assets in the last five years.

Finally, the book is still being written for crypto, real-time payments, and GenAI.

 

Reasons for Continued Excitement

The industry is now operating at scale, with more than half of the 49 companies in the F-Prime Fintech Index posting over $1B in revenue in 2023. Yet these companies still only scratch the surface on their potential, capturing less than 10 percent of total US financial services revenue. There is still so much room to grow.

Even scaled fintechs — that billion dollar revenue club — are just getting started and growing an average of 45 percent annually, more than three times the rate of public incumbents. We expect the IPO window to open in 2024 for scaled fintech companies like Stripe, Klarna, Circle… and hopefully many more. We will add them to the F-Prime Fintech Index when they meet our published criteria.

 

Go deeper: Access the full report via the F-Prime Fintech Index here.

Unpacking Fintech’s Q4 Rise

Fintech as a whole rose in Q4. Before we jump into the numbers, it’s worth highlighting a few notable stories hidden within them:

The Return of Buy Now, Pay Later: In the 11 months ending December 6, consumers spent $64.9B via BNPL platforms — a 15 percent jump from a year earlier. The markets reflect that rise, with BNPL provider Affirm’s revenue multiples tripling since Q4 2022. The company now trades at 11.2x. We have not seen that level of persistence for a publicly listed digital lender before — after all, Affirm has moved beyond B2C point-of-sale lending. On that note, in November the company announced that its partnership with Amazon had expanded to cover payments on its B2B store. Meanwhile, a surge in BNPL usage over Black Friday and Cyber Monday (up 20 percent on Black Friday and 42 percent on Cyber Monday) also lifted the company’s earnings.

Fellow BNPL provider Klarna is one of the top candidates to go public in 2024. But keep an eye on regulators, as the OCC recently issued a bulletin to help banks manage the risks associated with BNPL. For a deeper analysis on the vertical from an unapologetic BNPL evangelist, we enjoyed Simon Taylor’s “rant” earlier this month.

Crypto Spring?: Coinbase is currently trading at 15.1x, up from 1.3x in the depths of the crypto winter. That’s a stronger bounce than we’ve seen in cryptocurrency prices — Bitcoin has rebounded from $16,529 in December 2022 to $42,800 this month and Ethereum is now worth $2,562, up from $993 in July 2022. $4.6 billion changed hands on the new bitcoin ETF’s first day of trading — though the price has corrected post-launch and Vanguard did not join the likes of BlackRock, Grayscale, and Fidelity in launching a spot bitcoin ETF.

Shopify’s on a Roll: The e-commerce platform’s multiples have increased again QoQ and now trades at double its Q4 2022 multiple at 14.5x. What’s driving this growth?

• After pulling the plug on its logistics side quest in May, the company has re-focused on its main game: building e-commerce stores for brands, adding enterprise clients, facilitating better omnichannel and mobile commerce experiences, and building its wholesale offerings.
• That wholesale business is gaining traction, with B2B GMV up 61 percent in the first half of 2023. New customers include Kraft Heinz, Brooklinen, and Momofuko.
• Shopify has been well-placed to harness the tailwinds propelling vertical SaaS. Across the fintech category, investors consistently reward vertical SaaS companies over other fintechs for their recurring revenue, high gross margins, and economies of scale.

And now, for those of you who love diving into the details on public stocks, we have:

 

The Q4 Numbers

LTM revenue multiples rose across the board in the last quarter of 2023, from 4.0x in Q3 to 4.8x in Q4. Multiples rose for all growth rates and verticals within the sector.

By Growth Rate:

Source: F-Prime Fintech Index

Companies that grew less than 20 percent (typically the larger companies in the Index) saw the biggest jump in Q4, almost doubling from 1.8x to 3.4x thanks to a broad recovery in market capitalization and enterprise value. The other two growth segments saw modest gains — find an interactive version of the chart above under “Historical Metrics” on the F-Prime Fintech Index.

By Vertical:

Source: F-Prime Fintech Index

Wealth and asset management saw the largest jump, with average multiples rising from 3.4x to 7.3x. Coinbase and (to a lesser extent) Robinhood drove the rise — see below.

Proptech companies collectively traded above 1x for the first time since Q2 2022, rising from 0.9x to 1.5x. Digital mortgage platform Blend drove the rise for the second quarter in a row.

 

Zooming In on WAM

Driven by rising equity and crypto prices, WAM companies’ assets under management and transaction volume have rebounded. The overall crypto market capitalization is up 62 percent to $1.3T since the beginning of 2023. Since the WAM sector is mainly a tale of two companies, let’s check in on the main players individually:

Net quarterly revenue for Coinbase was down six percent in Q3 to $623M, but still higher than the $576M 12 months earlier. The company is marching towards profitability on a GAAP basis, only losing $2M in Q3 2023.

However, those aforementioned gains in the value of crypto assets and a corresponding rise in trading volume mean that Coinbase’s Q3 numbers were less than impressive in light of trade-based revenues. In the third quarter, Coinbase generated $289M worth of trading revenue (down 21 percent year-on-year), with $275M (95 percent) coming from consumer activity and another $14M (5 percent) from institutional traders. Those figures were $310M and $17M respectively in the second quarter of 2023, and $346M and $20M a year ago. For now, Coinbase’s main growth comes via interest-based income (including interest earned on customer custodial funds and loans), as well as subscriptions and services like its stable coin arrangement with Circle and USDC.

Source: Reuters

Monthly active users over at Robinhood have been declining month over month, but it has compensated somewhat with steady increases in its earnings per client over the last six quarters. Similar to Coinbase, it has also seen its revenue boosted by rising interest rates, with income from interest surpassing transaction-based revenue for the first time in the company’s history.

Source: Reuters

Index Removals: Finally, while M&A activity continues to pick up in both public and private markets, no F-Prime Fintech Index companies were acquired this quarter. However, crypto trading platform Bakkt no longer met our criteria and was removed from the Index.

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Written with Zoey Tang.

Over the last ten years, investing in wealth management has become decidedly more exciting on the back of TikTok “finfluencers” and direct-to-consumer brands like Robinhood, Titan, and Public. An estimated $45B of venture capital flowed into wealth startups over the last decade, with B2C startups receiving 80% of late-stage capital raised. Robinhood almost singlehandedly disrupted $1.4B of retail brokerage commissions when incumbent brokerages matched Robinhood’s free stock trading (see F-Prime’s Wealth and Asset Management sector report for more).

However, gems are often found on the seemingly sleepier sides of markets, and we see some of the most exciting startups solving problems in the traditional world of financial advisors (aka WealthTech). At F-Prime Capital, we have had the opportunity to partner with the founders of exceptional WealthTech companies, including Quovo (acquired by Plaid), Vestwell, FutureAdvisor (acquired by BlackRock), and Canoe Intelligence. We are also thrilled to have just led the Seed round in Dispatch (fka OneAdvisory).

We wanted to share why we feel WealthTech is so interesting right now and why Dispatch has an opportunity to become a core part of the modern wealth management tech stack.

 

Why financial advisors?

Easy: that’s where the money is. Just over half of retail investable assets are managed by ~300,000 financial advisors. Second, it is an industry that only gets bigger. Advisor-led assets under management (AUM) has grown a steady 8-10% over the last 10 years; up from $17 trillion in 2013 to $34 trillion at the end of 2022.

Why now?

The wealth management industry is experiencing a fundamental need for automation. While investing has become more automated over the last 10 years, most client-facing activities have not. Client onboarding, account opening, investment analysis, and reporting still involve an enormous amount of people and paper. We see four key drivers of automation, each presenting opportunities to rebuild the industry’s technology infrastructure.

Breakaway RIAs: Registered Investment Advisors represent the fastest-growing segment of wealth management. In 2022, nearly 1,300 advisors left traditional wirehouses (e.g., Morgan Stanley, Merrill Lynch, Wells Fargo, UBS) to follow the independent RIA route, taking an estimated $200 billion AUM with them. Alongside the breakaways, private equity is powering M&A across the industry – we estimate there were almost 1,000 RIA acquisitions in 2023. New RIAs want modern tech stacks (they are giving up those huge back-offices) and acquisitive RIAs want one modern tech stack, not one for each acquired firm. These trends require integration, digitization, and automation.

The rise of alternatives: Financial advisors were always a relevant channel for private equity, credit, and real estate funds; however, they are now the star of the show. Private funds need retail investors to continue growing, and financial advisors have embraced the idea of 25-30 percent allocations to private funds, substantially above the current five percent client average. It’s the perfect match, yet the infrastructure is missing. Client onboarding, capital calls, and reporting are all paper-based and advisors pay a high administrative price in exchange for the long-term commitment from their clients. We have written more here and here about the rise of alternative assets and the need for a new tech stack.

Generational wealth transfer: Financial advisors know they are on the verge of a stunning $70 trillion generational wealth transfer over the next 20 years. In anticipation, new wealth management firms like Titan and Facet are targeting those low-balance Millennials. While we expect both old and new firms to win their share, the one thing we know for certain is that Gen Y and Z want digital tools first, humans second. Most traditional wealth management firms will need major upgrades in their digital client onboarding, engagement, and reporting.

Artificial intelligence: We are just beginning to see AI extend into wealth management, but it is exciting to anticipate the impact it will have on client onboarding and servicing, as well as financial planning and advice. The combination of public and private LLMs can radically change the way clients interact with their advisors (and their chatbots). We wrote more about AI in financial advisory here.

 

Introducing Dispatch

Financial advisors recognize this need for automation, and numerous startups have emerged to address it. The typical financial advisor today uses 10 distinct financial advisory platforms, up from five just two years ago. The tech vendor landscape has truly exploded as well. As Jess Bost has noted, a picture is worth a thousand words:

At this point, the solution has become a part of the problem. There are so many fragmented point solutions and duplicative sources of customer and investment data, that just maintaining data integrity and synchronization has added manual work and risk of errors. Client onboarding into ten separate tech platforms robs advisors of the very productivity they hoped to gain by adding a new tech tool. While an all-in-one tech platform could in theory solve these problems, that is simply not going to happen in an industry with a complex value chain (asset managers, advisors, custodians, servicers, et al.), all-in-one platforms built through M&A, and a highly fragmented advisor base.

The talented co-founders Rob Nance, Madalyn Armijo, and Rafi Lurie started Dispatch to address this fundamental problem of data management. Dispatch automatically (i) ingests client data from tax returns, financial statements, IDs, etc., (ii) enters it into advisor tech platforms, and (iii) perpetually maintains data synchronization across the advisor tech stack. Where a custodian offers API access, Dispatch will also automate account opening.

This is one of those deep infrastructure solutions that solves an enormous pain point, offers an immediate ROI, and can run in the background as the integration layer for customer data. The more integrations they support, the more valuable they become to the industry.

We have never been more excited to be investing in wealth management and feel fortunate to have partnered with Dispatch. The team thinks big, cares deeply, and executes relentlessly. The next few years are going to be great!

When you put “wealth management” and “genAI” in the same sentence, most minds jump straight to some version of “autonomous finance.” However, that’s a concept that would have to overcome significant trust hurdles with advisors and the public to gain widespread adoption. According to research by Vanguard, the personal connection and trust that exists between financial advisors and consumers drives about 40 per cent of the value in any advisory service.

Over the last 10 years, advisors have started to transition from “stock pickers” to client relationship builders. As a result, new inefficiencies have emerged in the value chain: advisors now spend their time collecting and synthesizing information across a sprawling and outdated tech stack to help clients make decisions.

So, while generative AI isn’t going to put our money on autopilot any time soon, it has the potential to save advisors’ time by handling the more repetitive and labour-intensive aspects of their jobs. As a result, advisors will be free to build deeper relationships and trust with an expanding client base.

 

The current state of play
Most financial advisors juggle five different tech platforms every day:

Many of the steps outlined above involve pulling together disparate information, often supported by different tech stacks, and synthesising it all to generate insights – a unique strength of generative AI technology is that it can quickly process large amounts of data.

 

Freeing financial advisors from mundanity
Generative AI will enable the construction of new “co-pilots” for financial advisors. Seeking to cut costs in an environment of fee compression, firms are eager to automate routine tasks. Those tasks include reviewing legal documents, opening accounts, preparing client presentations, adjusting asset allocation, requesting query service, addressing ad hoc questions, and other activities beyond their core role of advising clients, which currently take up 36 per cent of advisors’ time. Put another way: the average advisor spends more than two hours “behind the scenes” for every hour they spend with clients.

One way that CIO offices have attempted to streamline these processes is through the creation of in-house research databases. However, advisors still burn much of their workday conducting research, digesting information, and surfacing the most relevant insights in response to specific questions by their clients. It’s important to remember that most of those clients are seeking intuitive responses from a human they trust, rather than highly technical or precise answers.

Generative AI can swiftly perform the synthesising legwork for an advisor, who can then spend more face-to-face time with the client, create suggestions, and ponder implications for their personal portfolios.

Some incumbents (such as Morgan Stanley) are taking the time to build these solutions in-house. However, legacy tech debt means  that they usually take a long time to build – for example, Bank of America spent 10 years and $100 million to build its proprietary Merrill One Wealth Management platform. Others are understandably open to partnerships – see JP Morgan’s and TIFIN’s initiative to develop AI-enabled fintech companies. Meanwhile, startups such as Parcha envision a co-pilot that goes beyond answering questions and can instead complete tasks autonomously.

Many startups have built compelling AI-enabled products for advisors: Muse finds tax deductions and credits; Toggle assists advisors with investment research and addresses client questions based on the firm’s proprietary research; Greenlite and Parcha AI assist wealth management companies with KYC review and fraud reduction; and OneAdvisory is automating the collection of client data and account opening while maintaining data synchronisation across the advisor tech stack. In the past, companies such as DriveWealth helped fintech players build investment products for their end users. Going forward, we see a similar opportunity for API-based solutions that help fintechs build GenAI-enabled co-pilots for wealth managers.

Over the last five years, a few trends have emerged that create opportunities for GenAI-enabled wealth management solutions:

Growing data pools: The amount of data available to wealth advisors (from their internal systems, partners, third parties, and elsewhere) has significantly increased over the past decade. If advisors can quickly understand and harness this data they will be well-positioned to optimise financial planning for their clients, and offer tailored products and data-driven advice.

PE involvement: A wave of consolidation in the wealth management industry, with significant participation from private equity firms, would suggest an easier go-to-market path for startups by selling to a single decision maker who oversees many advisors. A GenAI solution that gives advisors more time to reach new customers would be an attractive tool in a PE firm’s search for cost-cutting and efficiency-boosting tools.

End-to-end options: We have also seen the emergence of end-to-end RIA tech stacks from companies like Farther Wealth, Zoe Financial, and Savvy Wealth. Financial data is currently fragmented across a broad advisor tech stack, which hampers the ability to take advantage of GenAI in this field. However, an end-to-end solution could create a proprietary data lake to effectively power GenAI tools. These platforms also have no legacy tech debt, reduce per-head-cost of growing an advisory business, and could therefore accelerate AI adoption in the industry.

Increasing budget share: Finally, wealth managers are spending more on software – an extra 10 per cent of wealth managers’ budgets have gone to third-party tech purchases since 2018, mainly to replace the industry’s 20-to-30 year-old existing stack. This means that advisors have cause and budget to seek out new solutions, and a wedge with generative AI could be a great catalyst to switch.

 

Implications for wealth management
While it’s still early, it is clear that generative AI will have a profound impact on the wealth management industry. Here are a few potential effects we see:

– Automated creation of individualised client summaries and tailored performance reports en masse, portfolio synthesis for advisors prior to client meetings, and much more – all powered by GenAI;

– With more time on their hands, advisors will expend more effort on deepening and expanding their client base. Co-pilots will also cut the cost of service delivery, reduce the duration of client meetings, and make room for more self-serve and bespoke services;

– By allowing fewer advisors to serve more customers, AI-enabled tools should also expand margins for the larger companies in the F-Prime Fintech Index over time. Meanwhile, GenAI would expand the capabilities for the industry’s best wealth managers, allowing them to win significant market share. However, poor-performing managers may lose clients as they flock to high performers with increased capacity;  and

– Finally, as the cost of advisory services decrease, financial advice will continue on a trend of democratisation.

In 2022, we released a report highlighting the trends affecting the wealth and asset management sector. When we release our next report, we expect generative AI will have planted seed across the advisor value chain.

 

This story originally appeared in WealthBriefing.