How Technology Is Enabling Wealth Democratization

How Technology Is Enabling Wealth Democratization

Shreya Jain

1 December 2022

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Historically, wealth management has only been accessible to the ultra-wealthy. Although there have never been any official barriers stopping people from investing, the exorbitant minimum ticket price excluded those on a lower budget. The Federal Reserve found that the wealthiest people control the majority of equities, with families in the top 10% of income brackets owning 70% of the market value of all stocks.¹

However, a rapid rise of digital technologies is opening up new investment vehicles, such as cryptocurrencies, whilst widening the investor community by providing simpler and cheaper ways to invest. Investment hubs are shifting from Wall Street institutions to smartphone apps with incentives like free trading and the fractional ownership of stocks. This financial revolution is being led by an influx of FinTechs like Robinhood that are simplifying the process of investing and making it more accessible. Well-established financial institutions have clearly taken notice and are acting quickly to stay relevant to the changing and expanding audience. Financial services giants who have followed this movement of wealth democratization include DBS which launched its NAV Planner that leverages more than one hundred AI models to deliver personalised and actionable insights, helping Singapore residents better manage their money and grow their wealth² and JPMorgan Chase which acquired Nutmeg, one of the most successful robo-advisory providers in the British wealth management market³, enabling people from across the financial spectrum to passively invest funds based on their investment goals and preferred risk level.

Here are a few examples of how technology is enabling arguably the greatest market democratization of our times.

• Micro investing: In a bid to expand the investing audience beyond high net-worth individuals (HNWIs), WealthTech firms offer micro-investing platforms4 that allow investors with less savings to enter the investment market. Each time you make a purchase, the platform rounds up the cost to the nearest dollar and invests the difference into an ETF-based investment account. By lowering the cost of entry into the investment market and eliminating per-transaction fees and investment minimums, micro-investing platforms let people easily invest small amounts of money.
• Robo-investing: Robo-advisors use machine-learning algorithms to automatically build the best investment portfolios for clients, based on their financial situation and future goals. Robo-advisors enable people to invest money towards financial freedom by offering "more accessible investment and money management options at a fraction of the cost hitherto available with traditional models".5 Robo-investing offers a form of passive investing that expands the reach of investments for an audience that do not actively track the market.
• Digital brokerage: Digital brokerages are online platforms that leverage modern technologies to allow customers to get stock market data and access a range of investment opportunities. This breaks through a major investment barrier - the expensive flat fees per trade that were traditionally charged by brokers.

Advances in technology are changing the face of the wealth management industry by expanding its audience and introducing more inclusive and better use cases for all types of clients. These include retirement planning using robo-retirement technology 6 and tailored portfolios based on the risk appetite of each individual.

The democratization of wealth is a trend that looks set to stay. It is a new reality that appears to be accelerating constantly. As more and more providers start catering to a greater number of retail customers, early adopters continue to explore new technologies and alternative investment possibilities that simplify previously complex investments and make these options accessible and practical. Technology-led democratization⁷ is increasingly opening up new opportunities. Banks that are not already onboard need to start strategizing to make investments available to a wider section of society.

Sources:

1. https://www.federalreserve.gov/econres/scfindex.htm
2. https://www.dbs.com/annualreports/2020/consumer-banking-wealth-management.html
3. https://www.jpmorganchase.com/news-stories/jpmorgan-chase-enters-agreement-to-acquire-digital-wealth-manager
4. https://www.investopedia.com/terms/m/microinvesting-platform.asp
5. https://www.investopedia.com/best-robo-advisors-4693125
6. https://www.bankrate.com/retirement/how-to-invest-for-retirement-with-robo-advisor/
7. https://www.windmill.digital/blog/how-wealthtech-is-democratizing-investing/

Manager, Global Banking Industry