Digital transformation means transforming business processes with digital technology adoption, including moving data to the cloud, process automation, communication tools, and other technology-driven solutions. Today, digital transformation is on the rise, driven by customer demand, an extremely competitive environment, and pandemic impact.
According to Statista, by 2025, spending on digital transformation is forecast to reach 2.8 trillion U.S. dollars compared to 1.8 trillion U.S. dollars projected for 2022.
Being experts in the fintech and wealth management domain, we at Surf can say that the industry undergoes significant changes too, such as global-scale technology progress, changing regulatory requirements, and new emerging business models. Besides, both the advisors and the clients are becoming older, and generations X and Y are actively replacing them. These two generations have been growing up in a technology-shaped environment and have different needs and expectations on how advice and investment products are delivered, and we also have to keep generation Z in mind — for them, digitalization is not an option, it’s a must.
In this article, we want to tell you about the possible options of digitization in wealth management that would help you meet the users’ expectations and gain a competitive advantage, based on the experience of Robinhood, Vanguard, M1 Finance, and Round. We will also share our own concept of the investment app, so read on.
How to digitalize your wealth management services — four possible ways
There are four possible ways of digital transformation of your wealth management business. You may build:
- an app like Robinhood for do-it-yourself (DIY) investing;
- a robo-advisor;
- a hybrid solution (robo-advisor and DIY);
- an app that offers human-assisted investment advice.
We suggest considering each option in more detail: what business model they use, what advantages and disadvantages each option has, what technologies they are built on, and what eventual challenges you can face while implementing the chosen model.
Robinhood — why is it so popular?
Robinhood was founded in 2013 and introduced a pioneering solution: financial technology and a commission-free trading model. The trading and investment app has been growing in popularity and since 2014 the number of Robinhood users has increased from half a million to 22.4 million in 2021. As a result, many players in the discount brokerage market opt for creating apps similar to Robinhood.
There are several reasons and factors behind the popularity of the trading and investing app
- The app uses the DIY method which means investors can build and manage their own portfolios. DIY popularity has recently boosted because, after the pandemic-caused lockdowns, people are even more eager to control their finances.
- Robinhood’s goal is to make investing more affordable, so they offer industry-leading low basic trading fees. The app can be interesting for young investors and people who intend to invest in cryptocurrency.
- Robinhood is easy to set up and to use due to minimalistic and intuitive design, as well as UX focused on basics, including charting, watch lists, and cards. The app is available through a web- and mobile-based platform and offers a range of products for different customer needs that can be managed in one single app.
- Robinhood users can read recent news from sources like the Wall Street Journal, Reuters, Barron’s, CNN Business, Cheddar, and Reuters and receive push notifications about breaking news and significant facts to make more informed financial decisions.
- Robinhood uses standard security measures, such as face or fingerprint recognition or a custom pin, two-factor authentication, and encryption of sensitive information. Besides, Robinhood is a registered broker deal and member of the Securities Investor Protection Corporation (SIPC): users’ assets are protected in case of brokerage insolvency, unauthorized trading, or theft.
As the pioneer, Robinhood has developed a strong brand but still, there are some factors and challenges the company faced and had to respond to. And they are better to take into account if you are going to create a product based on the DIY strategy.
- Fit the app with all tools required for your target audience: Robinhood app can be appealing for beginners, but intermediate and advanced investors lack some digital tools of wealth management and resources they need for more sophisticated trading strategies: alerts, AI assistant, portfolio builder, trading simulator, heat mapping, short locator, screeners, and customizable charting options.
- Keep the app clear and equip it with educational resources especially, when targeting young investors. For example, in June 2020, a 20-year-old college student Alexander E.Kearns saw a negative balance of over $730,000 on his Robinhood app and committed suicide. The negative balance within the complicated options trading strategy may have only been temporary losses on paper that would change after trades settlement, but this was not clear from the platform.
- Provide sufficient customer support: Robinhood customer service is available through the app or the website, but there is no telephone number for customers to call for assistance. They can only enter the phone number for a callback.
- Ensure compliance with the brokerage industry rules and regulations: in June 2021, Robinhood Financial was fined nearly $70 million by the Financial Industry Regulatory Authority (FINRA) for several reasons, such as communicating false and misleading information to its customers, failure to exercise due diligence before approving customers to place options trades, failure to reasonably supervise the technology and to report to FINRA tens of thousands of written customer complaints.
What a robo-advisor is best for — based on Vanguard experience
The robo-advisor solution is not new. The advisors in the wealth management industry have been using the software to automate portfolio allocation since the 2000s. But after 2008, the robo-advisors became accessible also for customers. Robo-pioneers, such as Betterment or Wealthfront, disrupted the market by being less expensive and more comprehensive than traditional advisors and started delivering services to previously underserved segments such as young investors.
The robo-advisors use technology to automate the investment processes, are intuitive and easy-to-navigate, and allow clients to open accounts and start investing quickly. Nowadays, the robo-advisor industry moves towards banking, ethical investing, and direct indexing.
Vanguard, one of the world’s largest investment management companies, launched its Digital Advisor in 2019 only. It provides an automated investment advisory program that offers eligible clients access to discretionary investment advisory services through a full-featured website with a customer dashboard and a mobile app.
When compared to the competitors, Vanguard Digital Advisor disrupts the existing market by being reliably simple and cheaper. At the same time, the clients enjoy the benefit of years of data from a top investment company and a portfolio built on low-cost exchange traded funds (ETFs). Digital Advisor’s investment methodology has a solid groundwork, including the company’s own investment philosophies, fundamental research and data from a wide variety of external sources. Furthermore, the methodology is approved and periodically reviewed by the Advice Policy Committee of Vanguard Advisers, Inc.
The product covers investment and retirement planning calculators and tools, research and educational resources, and customer support.
Vanguard Digital Advisor suits best for the clients who:
- focus on long-term investments;
- value low-cost offerings;
- want to invest on their own using various tools and educational resources;
- needs a personalized plan to reach retirement goals;
- agree to leverage technology instead of receiving guidance from a human advisor.
Vanguard does not offer their Digital Advisor users any human advisor option, but they can check out Vanguard’s Personal Advisor Services platform to talk to advisors.
Merging advantages into a hybrid solution by M1 Finance
Another digitalization way is to make an app that combines the above-mentioned solutions:
- the app works somewhat like a robo-advisor offering automated investing, and
- offers features similar to an online broker with portfolio customization options.
This is a perfect fit if you want to attract both passive and active investors.
M1 Finance offers such a hybrid solution. It is a user-friendly and practical platform with a desktop and mobile version available for both iOS and Android devices.
M1 Finance combines advantages of DIY and robo-advisor approaches and has some distinctive features:
- Pie-based interface: The portfolio is based on customizable pie charts that provide an appealing graphic representation of the customer portfolio.
- Dynamic rebalancing: refers to how fresh deposits are assigned to buy orders based on the goal allocations specified. Underweight assets are automatically purchased with additional funds to bring them back to the allocated goal. The fresh deposits will rebalance the account.
- Portfolio customization: DIY investors can customize their portfolio according to personal preferences, risk tolerance, and diversity goals and invest in any individual stocks and ETFs they choose.
- Long-term investments: M1 Finance is not for day traders or frequent traders: it offers a one-trade window (two-trade windows are available exclusively for M1 Plus members with $25,000 or more in equity). The platform prioritizes long-term financial growth and focuses on building features that enable smart financial decisions.
- No portfolio advice: the platform provides no access to any human financial advisors. So, it suits the semi-experienced investors, having an idea of what they want to invest in.
- Security: M1 Finance is safe due to two-factor authentication and military-grade 4096-bit encryption. It is a registered broker/dealer with FINRA and a member of SIPC (Securities Investor Protection Corporation) that protects against the loss of cash and stocks held by a customer.
- Education: educational resources include a wide selection of articles on the blog, M1’s social media sites, videos, and “The Investors Mindset” newsletter.
Human-assisted investment advice at the premium level as implemented by Round
If you have chosen the specific segment to serve, you may create a product that meets the needs of your target audience.
As an example, an investment management platform, Round targets investors with a more aggressive approach to the market than most other automated investing platforms allow. With the service, it is possible to invest in complex asset classes. The platform’s goal is to make active hedge-fund-style investing accessible to anyone without committing millions of dollars.
The competitive advantage of the Round platform over other automated investing platforms is that it partners with seven globally recognized investment firms to get access to asset classes like mortgage-backed securities, collateralized loan obligations, asset-backed securities, and private equity. Based on the individual needs of the customers, Round chooses some world-class fund managers and invests with them on customers’ behalf. Further on, the fund managers monitor the investments.
In terms of technology, like many other competitors, Round offers a web platform and a mobile app with an overview of the customer’s account, including a portfolio value chart over time and a detailed breakdown of investments made by seven aforementioned firms. But the Round platform does not provide options to customize the portfolio. Any changes to the investment structure require contacting Round representatives for help.
How to make a mobile app for both broker and investor — concept by Surf
The wealth management services are moving to a client-centric approach. These are users who decide whether to stay with your product or switch to your competitors’ one. Therefore, we at Surf always start with analyzing the potential customers and their needs. And we developed an investment and trading app concept that takes into account the interests of brokers and investors.
Based on the market analysis and having learned the investors and brokers behavior, we equipped our app with the following features
- a virtual assistant to identify the user goals and match them with solutions available;
- one account with several portfolios according to the user’s goals;
- configurable portfolio to accept or adjust suggestions manually;
- automatic buying to save investors’ precious time;
- comprehensive analytics to ensure data accuracy;
- educational materials to improve users’ financial literacy, and more.
More details about our concept including illustrative mockups you can find in our case study.
Today, we witness the world shifting towards remote work. Technology is evolving and digitalization is a must for being competitive in the market. Digital transformation is here as clients’ expectations change and wealth management is no exception: the wealth management technology solutions are numerous and more convenient. So do not hesitate to analyze and learn from the experience of your successful rivals to gain a competitive edge and digitalize effectively.
You can choose any business model that suits your business goals, and either follow it and take into account all eventual challenges other companies have already faced, create a user-friendly product backed by your company’s experience and knowledge accumulated, or choose your specific segment and target it.
In any case, whether you decide to combine advantages of various solutions or create your own unique one, Surf is ready to implement your ideas. Just contact us.