Although $8 billion in venture capital has poured into fintech companies over the last five years, the dramatic disruption many predicted to hit the financial advisory industry might be unnoticeable to the average investment advisor, according to a trio of Morningstar analysts during a panel looking at fintech technologies and companies that will affect wealth managers at the Morningstar Investment Conference in Chicago.
Adley Bowden, vice president of market development and analysis at PitchBook, which was bought by Morningstar in 2016, noted that today there are more than 1,000 VC-backed fintech companies, compared with 300 in 2011. He said that the advisory business seems to be a last bastion for fintech reform as systems are complex and archaic, as are the regulations. He sees fintech as an interface application, which won’t necessarily be seen by the consumer but used in the back office.
He also noted that some VC-backed fintech firms are pursuing fake or unsustainable models. That said, some are reaching scale in the space; for example, Wealthfront got a $2 billion investment.
Colin Plunkett, equity analyst at Morningstar, said that there are common themes with various industries in terms of disruption. “Disruption happens over a longer period of time, like two generations. Any disruption heralded like Uber is completely unsustainable. Historically, Merrill Lynch was the pre-eminent disruptor; that was 70 years ago when it pioneered a cheaper underwriting model that allowed them to sell direct to investors,” he said. “Then in the 1970s the SEC allowed investors to negotiate commissions and that led to the rise of discount brokers, who then became a primary disruptor. Robo-advisors will be acquired by larger firms and integrated into their platform.”
Abby Magen, product manager of Morningstar’s wealth forecasting engine, said that the distribution landscape is changing dramatically, providing investors different avenues to get their information. She added that tangential firms, such as SoFi, that haven’t been native to the space are creeping in more and more through millennials. “Millennials don’t go to a banks for a loan, or to an investment advisor office; this is changing.” She also says big online firms such as Amazon, Facebook and Google are gaining interest in the fintech area and could force dramatic changes as well.
“Companies that change an industry often will target people that are just about to achieve their income level and grow and mature with them,” Plunkett said. This type of long-term relationship can be very profitable, he added.