The Future of Fund Distribution: Fintech and the Democratisation of Investment Solutions
Introduction
The traditional landscape of investment management, dominated by high minimums, opaque fees, and limited access, is undergoing a seismic shift. Fueled by the relentless march of technology, financial technology (Fintech) is revolutionising the way investment products are distributed, ushering in an era of democratisation. This article delves into the transformative role of Fintech in making investing more accessible, efficient, and personalised for a wider audience.
Tech, tech, boom
As Deloitte acknowledges in the company’s paper ‘How can Fintech facilitate fund distribution’, “Fintech is more than a buzz word. It is a game changer in the operating model of asset managers, distribution intermediaries, and service providers” [1]. McKinsey research shows that revenues in the fintech industry are expected to grow almost three times faster than those in the traditional banking sector between 2022 and 2028. [2]
Advancements in technology have always been part of the financial world, but the scale of transformation experienced in the 21st century is without precedent. “Digital innovation has brought major improvements in connectivity of systems, in computing power and cost, and in newly created and usable data,” say Feyen, Frost, Gambacorta, Natarajan and Saal in their Bank for International Settlements paper. “These improvements have alleviated transaction costs and given rise to new business models and new entrants.” [3]
Separate McKinsey research shows nearly half of all US consumers utilised fintech products in 2021 [4], while 84% of UK respondents to a 2022 Plaid survey reported using Fintech every day [5]. Meanwhile, venture capital funding raised by fintech firms escalated from $19.4 billion in 2015 to $33.3 billion by 2020 [6]. This is an industry on the up.
The rise of robo-advisors
Algorithmic investment management, popularly known as robo-advisors, has emerged as a game-changer in fund distribution. These automated platforms leverage sophisticated algorithms to create and manage personalised investment portfolios for clients. Through a series of questionnaires, robo-advisors assess an investor’s risk tolerance, financial goals, and investment time horizon. Based on this data, they construct a diversified portfolio of low-cost exchange-traded funds (ETFs) and rebalance it periodically to maintain alignment with the investor’s goals.
The number of users in the robo-advisors market is expected to reach 34.020 million by 2027 [7]. The appeal lies in their accessibility. Unlike traditional wealth managers who cater primarily to high-net-worth individuals, robo-advisors typically require no minimum investment amount. This opens the door for a new generation of investors, particularly millennials and Gen Z, who may have smaller investable assets but a strong desire to participate in the market. Additionally, robo-advisors offer significant cost advantages. Their automated nature eliminates the need for human advisors, translating to lower fees compared to traditional investment management services.
However, robo-advisors are not without limitations. Their reliance on algorithms limits their ability to offer complex investment strategies or cater to individuals with unique financial situations. Additionally, the lack of human interaction may not suit investors seeking personalised advice and emotional support during market volatility.
The power of online platforms
Online brokerage platforms are another significant force shaping the future of fund distribution. The online trading market was valued at $10.21 billion in 2022 [8] and is likely to reach $13.3 billion by 2026 [9]. These platforms provide investors with a user-friendly interface to research, buy, and sell various investment products, including stocks, bonds, ETFs, and mutual funds. They offer a plethora of educational resources, market analysis tools, and real-time data feeds, empowering investors to make informed investment decisions.
The rise of fractional shares, facilitated by online platforms, further democratises access to the market. Traditionally, investors needed to purchase whole shares of a company, which could be cost-prohibitive for high-priced stocks. Fractional shares allow investors to buy a portion of a share, enabling them to diversify their portfolios with even limited capital.
Furthermore, online platforms have ushered in the era of commission-free trading. This eliminates the traditional per-trade fees charged by brokers, significantly reducing investment costs and making frequent trading more accessible. However, concerns linger about the potential impact of commission-free trading on investor behaviour. The ease of execution may encourage impulsive trading practices, ultimately hindering long-term investment goals.
The mobile revolution
Smartphones have become ubiquitous, and Fintech is capitalising on this trend by offering mobile investment apps. These apps provide on-the-go access to investment accounts, allowing users to monitor their portfolios, place trades, and stay informed about market movements. The convenience and immediacy offered by mobile apps are particularly attractive to younger generations accustomed to a mobile-first experience. In 2021, more than 130 million people traded stocks using online trading apps. [10]
Mobile apps also have the potential to gamify investing, making it more engaging and accessible to a broader audience. Features such as virtual portfolios and educational quizzes can encourage financial literacy and make investing less intimidating for beginners. However, the gamification of investing poses potential risks. It could trivialise the inherent risks associated with the market and lead to impulsive investment decisions.
Challenges and opportunities in the democratisation of investing
While the democratisation of investing through Fintech presents a wealth of opportunities, it also introduces a set of challenges that must be addressed. One significant concern is the potential for increased market volatility. With a larger pool of retail investors participating in the market, driven by factors like social media trends and gamification, market fluctuations could become more pronounced. To mitigate this risk, financial education and investor awareness campaigns are essential.
Another challenge is the protection of investors. As the Fintech landscape expands rapidly, regulatory oversight must keep pace to prevent fraudulent activities, data breaches, and other risks. Ensuring transparency in fee structures, safeguarding investor data, and establishing clear regulatory guidelines are crucial for building trust in the industry.
Despite these challenges, the potential benefits of democratising investing are substantial. By broadening access to investment opportunities, Fintech can contribute to wealth creation, economic growth, and financial inclusion. It can also empower individuals to take control of their financial futures and achieve their long-term goals.
The role of financial advisors
While technology is reshaping the investment landscape, the role of human financial advisors is far from obsolete. In fact, their expertise is becoming even more valuable in navigating the complexities of the digital age. As investors gain access to a wider range of investment products and information, the need for personalised advice and guidance increases.
Financial advisors can help clients develop comprehensive financial plans, manage risk, and make informed decisions. They can also provide emotional support during market downturns and help clients stay focused on their long-term goals. The integration of technology into the advisory process can enhance efficiency and improve client service. For example, advisors can use digital tools to gather client data, analyse investment performance, and provide personalised recommendations.
The importance of financial education
To fully realise the benefits of democratised investing, financial education is paramount. Empowering individuals with the knowledge and skills to make informed investment decisions is essential for long-term financial success. Financial education programs should cover a wide range of topics, including investment basics, risk management, portfolio diversification, and retirement planning.
Schools, employers, and financial institutions have a role to play in promoting financial literacy. By incorporating financial education into school curricula, we can equip young people with the knowledge they need to make sound financial decisions throughout their lives. Employers can offer financial wellness programs to help employees achieve their financial goals. Financial institutions can provide free educational resources and tools to their customers.
The future of wealth management
The convergence of Fintech and traditional wealth management is giving rise to a new breed of hybrid models. These models combine the efficiency and scalability of technology with the personalised touch of human advisors. Robo-advisors, for instance, can handle routine tasks such as portfolio rebalancing and asset allocation, while human advisors can focus on providing high-touch services to clients with complex financial needs.
Moreover, the rise of open banking and data aggregation is transforming wealth management. By connecting to various financial accounts, advisors can gain a holistic view of clients’ financial lives, enabling them to offer more comprehensive and tailored advice. This data-driven approach can also help identify potential investment opportunities and risks.
Investment solutions will become increasingly hyper-personalised, entirely tailored to an individual’s needs and preferences. Artificial intelligence (AI) will play a critical role in analysing investor data and recommending suitable investment strategies. The market size of AI in fintech was estimated at $44.08 billion in 2024 and is forecast to exceed $50 billion in 2029. [11]
Impact investing is likely to become increasingly commonplace.Investors, particularly millennials and Gen Z, are increasingly interested in aligning their investments with their values. Fintech platforms will cater to this demand by offering a wider range of sustainable and impact-focused investment products.
As the Fintech landscape continues to evolve, regulators will need to strike a balance between fostering innovation and protecting investors. Regulatory frameworks will likely focus on ensuring transparency in fees, mitigating cybersecurity risks, and promoting responsible investment practices.
Fintech and the democratisation of investment solutions
Fintech is not just disrupting the financial services industry, it is democratising access to investment opportunities. By lowering barriers to entry, providing educational resources, and offering innovative digital tools, Fintech is empowering a new generation of investors to take control of their financial futures. This democratisation of investing has the potential to unlock significant economic growth by bringing a larger pool of capital into the market. However, it is crucial to ensure that this growth is accompanied by responsible investment practices and robust financial literacy initiatives.
As technology continues to advance, it is essential to prioritise financial education and investor protection. By equipping individuals with the knowledge and tools they need to make informed investment decisions, we can build a more financially literate and resilient society. By fostering a collaborative environment between Fintech innovators, regulators, and traditional financial institutions, the future of fund distribution can be one that promotes financial inclusion, empowers individuals, and fosters a more stable and sustainable financial system.
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Sources
[3] https://www.bis.org/publ/bppdf/bispap117.pdf
[8] https://invezz.com/research/online-trading-statistics/
[9] https://invezz.com/research/online-trading-statistics/
[10] https://invezz.com/research/online-trading-statistics/
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