The emergence of digital wealth management platforms and applications has transformed the financial literacy of a vast number of individuals worldwide.
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The good thing that has come from the experience is that more individuals than ever before may now invest at a lesser cost.
The fact that digital wealth managers like Sarwa now let users create accounts with as little as $5 is truly amazing.
Accessible financial tools have opened the door for even more ground-breaking services nowadays.
By making investing and financial advising more digital and individualized, digital wealth managers are making once-exclusive financial services accessible to everyone. This effort has significantly changed how novice investors perceive the potential of wealth building.
Wealth management is no longer reserved for the extremely wealthy.
Nonetheless, a lot of people continue to underutilize the incredibly accessible digital wealth management options that are already available.
Some people still (erroneously) compare exclusive investment advice companies or traditional brokerage services to digital wealth management.
However, a deeper examination reveals that digital wealth management is more than simply an advice or brokerage service for investments; it also provides many of the necessary instruments that the typical individual needs to accumulate wealth.
We uncover all the information you want to understand how digital wealth management progressed to become the transparent and easily available service it is now, ultimately leading to the emergence of technology-driven services that currently characterize robo advisers.
Click on section 3 below to learn more about digital wealth management without having to read the background information, however it is recommended that you do so for context.
1. The mainstreaming of wealth management (a brief history)
Reviewing how defined-contribution retirement plans surpassed defined-benefit plans is necessary to comprehend how wealth management became widely accepted worldwide.
In a defined-benefit pension plan, an employee receives a fixed quantity of money upon retirement in the form of an annuity or a lump sum payout. A defined-benefit plan is noteworthy for being employer-sponsored, which implies that the company is in charge of handling the money and taking on any investment risk.
Employers are required by this plan to use a predetermined formula that takes into account an employee’s past income history and duration of work in order to determine how much pension payment they will get when they retire.
The employer is required to make sure the employee receives the computed pension payment because it is employer-sponsored.
For a very long time, defined-benefit retirement plans dominated the retirement market in much of the world. The defined-contribution plan, on the other hand, emerged as a substitute in 1978 and gained popularity quite rapidly.
A defined-contribution plan allows employees to make salary-based contributions to the plan.
Additionally, the worker is in charge of choosing investments from a menu inside the plan.
The defined-contribution plan placed the onus of duty on the employee, as opposed to the employer-sponsored defined-benefit plan.
Furthermore, the employee’s retirement benefits are contingent upon their contribution level and the performance of their selected investment plan; they do not anticipate receiving a defined, fixed pension at that time.
Defined-contribution plans eventually replaced defined-benefits plans as the most popular kind of retirement plan.
The fact that employees who knew nothing about investing or investment management before—because their employers handled everything—now had to make the appropriate investment decisions is one of the main effects of this shift.
As a result, there was a huge demand for customized wealth management services.
Let’s fast-forward to the present: Today, not just the wealthy but even the typical worker has to have a solid education in order to make wise investment choices that will undoubtedly have a significant influence on when they retire.
In other words, money management has become commonplace.
2. The growth of online money management
The incapacity of defined-benefit plans to provide employees with the money they “promised” when they retired caused them to lose favor.
Several of these funds went insolvent, meaning they ran out of money before they could pay their retirees, as a result of market returns that occasionally fell short of expectations.
This issue gained attention both during and after the 2008–2009 global financial crisis.
Across all OECD (Organization for Economic Co-operation and Development) nations, more over $5.4 trillion was lost in 2008.
Then, as a result of the financial crisis, defined-contribution plans would become more popular, further mainstreaming the already well-established practice of wealth management.
The majority of defined-contribution plans first made mutual fund investments. The role of wealth managers was to assist staff in selecting the appropriate mutual fund portfolio to increase their retirement savings.
A mutual fund is a collection of funds from several individual investors that are managed by qualified money managers and invested in fixed-income instruments (income mutual funds), bonds (bond mutual funds), equities (equity mutual funds), and other securities.
A portfolio of mutual funds owned by an individual will include some investments in bonds (bond mutual funds), equities (equity mutual funds) for their low risk, and fixed-income instruments (income mutual funds) for consistent income.
Professional traders aggressively trade mutual funds, buying and selling them on a regular basis with the goal of outpacing the market and assisting investors.
Since equities yield the biggest returns, the performance of a mutual fund’s equity funds determines how well it can beat the market.
Nonetheless, concerns regarding mutual funds’ capacity to provide retirees with the returns they desired started to surface due to their persistent underperformance in comparison to the market.
A staggering 70% of domestic equities funds, or mutual funds with stock market investments, underperformed their benchmarks in 2019.
71% of large-cap mutual funds, or funds that invested in the equities of large-cap businesses, underperformed their benchmarks for the eleventh consecutive year (2010-2019).
In the period spanning from 2015 to 2019, 78.38% of equity-linked savings plans, 40.91% of mid/small-cap equity funds, and 82.29% of large-cap equity funds underperformed their respective benchmarks.
The issue is the high cost of mutual fund investing. They pay more taxes and expensive management fees in an attempt to beat the market—which, as mentioned above, they virtually ever achieve.
The persistent underperformance of mutual funds sparked interest in passive investing as a substitute for traditional investing methods.
Instead of outperforming the market, the goal of passive investing is for the individual to equal the performance of a certain index. As a result, passive funds have been shown to offer superior long-term returns and are more affordable due to fewer fees and taxes.
3. What’s the meaning of digital wealth management?
To put it simply, digital wealth management is the process of offering digital financial and investment services to a broad spectrum of clients by utilizing risk management, big data, artificial intelligence, and financial technology.
The move over the last ten years from active to passive investing has increased demand for automated investment processes.
Wealth managers who prioritize technology, sometimes referred to as robo advisers, started using financial technology to automate investing. This removed the necessity for regular face-to-face communication between investors and wealth managers and, more crucially, removed emotion from the investment process.