Last year, new bank and brokerage combinations emerged and wealth-related fintech investments made frequent headlines. Morgan Stanley purchased E-Trade and Eaton Vance in October; Charles Schwab added TD Ameritrade and Motif Investing’s technology and development staff to their roster; Goldman Sachs acquired Folio Financial’s clearing and custody platform; and BlackRock announced it would acquire Aperio. What do these deals have in common? An investment in new products and technologies that target individual investors and I don’t believe this cycle of investment is over.
One trend driving these acquisitions is the growing interest in direct indexing—customizing an index-based portfolio to meet client needs. This strategy holds clear appeal to end investors by maintaining the risk profile and low cost of index investments but tailored to their preferences and goals. In promise: thematic, efficient investing that is customizable for the individual.
The biggest names in wealth are betting on products like direct indexing to capture new clients and drive competitive advantage in a crowded industry. This spate of acquisitions suggests that direct indexing, once a product created for high touch, high AUM wealth clients, has the potential to meet the needs of many potential clients, regardless of their account size. In other words, the arms race to bring these products to the masses is on.
Scaling up in wealth management had always meant increasing AUM by bringing on new advisers but with this shift, we are looking at a landscape where technology may now be the dominant source of scale. This change in perspective is an exciting pivot for the industry and the question facing managers now is: how do firms capitalize on these acquisitions to further engage clients/advisers, support more customization, and evolve their operating model?
Beyond bringing on new product types, we see leaders in wealth prioritizing three channels for growth through technology. The first is a focus on “omnipresence.” Everyone needs to be everywhere to attract assets, so managers are acquiescing to the massive integration needs required by the wealth industry; instead of fighting the gross number of connections, firms are overemphasizing their API catalogs or looking to emerging "data exchange" technology. The second area for growth is a movement to cloud-based everything, with limited exception. Wealth management is a scale industry tailor-made to benefit from unlimited, elastic infrastructure. And the last channel we see is firms continuing to focus on is providing more intelligent tools to their end users, whether advisers or clients. More exception-based work and predictive user experiences allow adviser networks to concentrate on clients and this is driving scale across platforms and home offices.
Looking forward, consolidation will leave fewer firms that can operate everywhere. For the largest players in asset management, the clear distinction between wealth versus retail and institutional management will continue to be broken down by technology. These industry leaders are looking for, and finding, more synergy between wealth and traditional brokerage business lines and investment management businesses are following very closely behind. My expectation is that we'll see acquisition momentum grow in 2021 and continue to put a premium on wealth-focused businesses, especially those with technology capabilities that help change scale.