An Overlooked Opportunity in Wealth Management

Why VCs Stay Away From Wealth Management

There are a lot of reasons for investors to like the wealth management industry: its business is often priced on appreciating assets, so revenue almost inherently grows over time, advances in technology and AI are clearly applicable, and new customer segments, needs, products, and business models are fueling innovation in the sector.?

It makes sense then that many of the big startup names in fintech are related to investment management, and anecdotally I can say that my team gets pitched a new roboadvisor business idea at least once a week.?

Yet wealth management has remained a relatively small segment of fintech venture capital dollars overall. In 2023, only ~7.3% of fintech investment dollars went to wealth management:

At Fenway Summer we like to dig deep into verticals within financial services, and around the summer of 2023 I started digging into wealth management.? Specifically, I wanted to solve the million-dollar question of how the future generation thinks about wealth, and how they will want to invest it. When I started talking with other VCs about wealthtech, I heard a lot of excitement about the future of the industry but I also heard a lot of dismissal about the category as being venture viable.

Here were some common themes from the conversations:?

• The market is too fragmented to support massive financial outcomes : Wealth management services are offered through banks, wirehouses, broker-dealers, registered investment advisors, roboadvisors…the scattering of firm types and methods for accessing wealth services makes distribution difficult, whether your product is built for the advisor or for the client.?
• The industry is too technical and complicated to make big bets within: Wealth management is a niche within a niche. The industry opaque and complex which makes it a difficult one to learn, and to make matters worse it’s highly regulated, leaving minimal room for error.?
• The product of financial advice is overrated: It has been fascinating to me how many regular people I spoke with valued or sought out experts who could help them with their finances, and yet professional investors brush off financial advisors and RIAs as a total anachronism that will inevitably be disrupted in favor of solely technical solutions. Maybe it’s because, as professional investors, we are pretty good with managing money, and it’s easier for us to do that in our personal lives as well; at the very least we must enjoy it more, hence our preference for self-serve tools over actual financial advice.?

The underlying narrative for wealth management in venture capital seems to be that all the innovation in this space has already happened. Older generations like their financial advisor just fine and don’t have any interest in changing things up, and younger generations are well served by roboadvisors that already exist.?

As I had these conversations and continued doing my own research I came to my own conclusion, which is that I almost completely disagree. The current state of the industry is comfortable, but it’s not stable. And I believe that the future of wealth management is going to look very different than it does today.?

Examining The Next Generation of Wealth

According to wealth management firm Cerulli Associates, U.S. baby boomers are expected to transfer approximately $51T to their Gen X, Y (millennial), and Z heirs by 2042 in what has become known as the Great Wealth Transfer.

The beneficiaries of this transfer are younger generations that have faced a myriad of headwinds to potential wealth-building. The explosion in student debt, a rising cost of living and specifically homeownership, the dot-com bust, the Great Recession, and the Covid-19 pandemic, have all generated feelings of financial insecurity and doubt about fundamental lifestyle decisions like the ability to get married or have children, let alone retire.?

This large and heterogenous customer base is actively looking, or will soon be looking, for support in managing their money, and will not go about wealth management in the same way as previous generations. They might prefer a more modern, digital-first experience, and they are far more likely to be wary of the AUM-based fee model that has always been industry standard.?

Younger wealth clients also have higher expectations of their advisors, seeking holistic wealth planning as the basis of their relationship, not as an added benefit. In fact, 70% of heirs will likely fire or change financial advisors after inheriting their parents wealth. This shift in the model threatens the underlying scalability and indefinite retention of the current state, which is where the opportunity for new growth lies.

In tandem with this cultural movement, technological advances such as the proliferation of AI, Generative AI, and API integrations, as well as innovations specific to financial services like open banking, are fueling the next wave of wealth management. While I believe that it is unlikely that AI chatbots will disrupt the industry by completely displacing financial advisors, AI will undoubtedly alter their roles drastically. The vast majority of the advisor community can see the writing on the wall, with 9 out of 10 advisors in a 2024 survey saying they would switch firms for access to better technology along with many advisors leaving large wirehouses and institutions to start their own investment firms.?

Lastly, by 2030, women will control two-thirds of U.S. wealth for the first time in history compared to one-third today. Yet only one in five financial advisory firms are women-owned and only 30% of lead advisors are women.

And this isn’t necessarily a story of woke victory or female empowerment. Despite professional progress, women continue to dominate household administration: they book summer camps, they shift the landscaper from Tuesdays to Thursdays, and they research an advisor to help with their 401(k) rollover. Firms with golf-centric client acquisition models won’t reach this professional woman for whom “hire a financial advisor” sits next to “sign field trip form” and “deposit for Maui VRBO” on her to-do list outside of her 9-5 job responsibilities.?

So, Who Wins the Future of Financial Advice??

The current picture of wealth management is older (the average age of a wealth advisors is 55, and the average age of a wealth client is 65), it’s homogenous, and it’s set in its ways (continuing to price on an AUM-based fee, continuing to hold hefty minimum expectations, and continuing to primarily view its role as stockbroker instead of financial planner).?

I believe the future of wealth management will skew younger and more diverse, and therefore the actual services offered and distribution of those services will have to change. Financial planning software is expected to see the largest increase in adoption and use by advisors over the next twelve months, and the shift to more fiduciary-based services means clients are still looking for a human advisor, not just Generative AI to assist them with asset allocations.

The demand for more holistic services coupled with tech solutions that are easier to integrate and faster (and better) at complex, compliance-laden tasks than human beings are might enable an advisor-led industry where machines can be machines and free up humans to develop deep, trusted relationships and accountability valued by clients.

This research and the resulting thesis led to Fenway Summer 's recent investment into and partnership with RightWise Wealth , a modern financial planning and wealth management firm that exists to create high integrity wealth for its clients and advisors. RightWise helps high-earners organize and optimize their full financial lives through high-touch, relationship-centered fiduciary advice. The firm trains accomplished, trustworthy, mid-level career professionals to become financial advisors or to join its Ambassador Program, a flexible passive income opportunity for people who are curious about finance and have strong networks that they want to connect to dedicated advisors and financial resources.

As part of our investment into the firm, I'm proud to say that I have also joined the team at RightWise as the Head of Operations, and am excited to be a part of building the future of financial advice with Founding Advisor and CEO Caitlyn Driehorst because to me, financial-advisor-led wealth management as an industry is unprepared to suit the wants and needs of a new wave of clients, creating a massive opportunity for founders to build and VCs to invest.

While these are the facts are what drew me in to the space, ultimately, the reason I’m excited to continue investing in the future of wealth is because of what a feel-good sector of finance it is. Wealth management, when done right, is all about making your money work for you, achieving your goals, and providing peace of mind for you and your loved ones. It’s aspirational and exciting, in a way that some other areas of finance are not. In lending you must collect from people who often have sympathetic reasons not to pay you. In payments, fraud is an omnipresent antagonist. In wealth management, you help people plan towards their goals with confidence and retire with pride. It doesn’t make lending or payments any less important, it just makes wealth management (in my clearly biased opinion) a lot more fun.

If you’re building a revolutionary business in wealthtech, I’d love to talk. Maybe you agree wholeheartedly with my idea for the future, or maybe you want to tear it to shreds – either way, I’m up for a good conversation and Fenway Summer is always looking for the next founder to support at the earliest stages of their company building (and wealth building) journey.?