The number of wealthtech companies entering the financial advice industry seems to mushroom each year. There are a variety of reasons for this.
For one, demand is sky-high. Firms and advisors are, more than ever, looking for ways to improve workflows and efficiencies. That, in turn, allows them to serve more clients and grow revenues, which helps to create a reinforcing loop in the market.
Another, of course, is that wealthtech businesses, like the rest of the tech sector and other intellectual property providers more broadly, enjoy sizeable margins. This doesn’t guarantee they’ll be able to win enough customers to become profitable, but it makes them more appealing to founders and investors.
To be sure, many of the new entrants over the years have delivered quality tools and platforms that have, on balance, improved the industry. Yet, more recently, some of the established players have contributed to a trend that isn’t so good: the de-prioritization of risk.
Why this has happened is clear. Some companies believe their aggressive growth targets will be more attainable by shifting their focus to other areas like lead generation. But in doing so, they ignore the needs of the market they are purportedly trying to support by offering check-the-box, limited-in-scope risk tools.
Dangers Abound For Clients And Financial Advisors
Without a multi-dimensional view of risk, advisors and clients tend to focus on notions of risk tolerance. But conversations like that can be fraught exercises, boiling down to what a client can stomach emotionally. That’s hardly the best way to approach investment decisions.
Indeed, it’s possible—or even probable—that a client can be a bit more aggressive in their portfolio than they intuitively believe, given their risk capacity, which, of course, is a much different concept. However, it can be difficult for advisors to convey that without the proper tools.
Notably, the opposite is also true. Comprehensive risk tools are just as essential to serve investors willing to confront risks they cannot afford to take. In either instance, not having them could mean that a client will fail to meet some of the goals they have established for themselves.
To think about this another way, when platforms de-prioritize risk, they ignore how much the very concept of it underpins each client-advisor conversation. Most revolve around goals. What are they, and how are we going to reach them? But without an in-depth understanding of where a client falls on the risk spectrum, these questions become, if not pointless, much more difficult to answer.
Risks For Wealth Management Enterprises
Meanwhile, the stakes are just as significant for firms. The SEC handed out $6.5 billion in fines last year, with the average penalty exceeding $10.4 million.
Not only are sanctions like this costly, reducing valuations at a time when M&A is a huge consideration, but they can devastate reputations. That’s why in-house compliance professionals need to understand risk at all levels—the firm, the advisor, each household and each account. That way, they can more easily determine whether holdings or concentrations, spanning each portfolio, have become inconsistent with client investment objectives—and whether to take corrective action.
But with so many wealthtech providers prioritizing other parts of their platform, it is an open question as to how easily firms can do this. That’s a problem given the SEC’s penchant for handing out fines and the fact that many expect the regulator to ramp up Reg BI enforcement actions going forward.
Creating A Void In The Market
Typically, when there’s a hole in a crowded market like wealth management, entrepreneurs rush to fill it.
But in this case, the irony is that many of today’s wealthtech offerings have created a void by trying to provide what they think firms want instead of focusing on what they can’t do without.
Akhil Lodha is the CEO of StratiFi Technologies, a financial technology platform for wealth management enterprises and their financial advisors.