15 Mar The fintech revolution and how it is disrupting traditional wealth management
Although considered a relatively new phenomenon, fintech has existed for many years.
From the original shift from analogue to digital, led by traditional financial institutions in the 1990s, to the more recent emergence of blockchain technologies and mainstream use of integrated payment solutions and NFTs, fintech has driven a revolution in the financial sector and is disrupting more and more areas of the digital economy.
The global fintech market reached USD 194.1 billion in 2022 and is projected to grow to USD 492.81 billion by 2028. This unprecedented growth has begun to influence traditional wealth management as digital solutions are now being created to meet the evolving demands of investors for ease of access, lower fees and more customised, dedicated portfolios.
How the UAE has embraced fintech
The UAE was an early adopter of fintech thanks primarily to supportive government policies and initiatives such as regulatory sandboxes, investment funds and streamlined visa programmes that have attracted large numbers of fintech startups to the country.
In 2022, 34% of total capital amassed in the first half of the year was generated by fintech, demonstrating the confidence investors have in the UAE market and the efforts of jurisdictions such as the Abu Dhabi Global Market and Dubai International Financial Centre in providing an ideal environment for financial services innovation.
As the number of fintech providers in the UAE continues to rise, the provision of wealth management services continues to evolve, enabling wealth managers to improve their service offering by leveraging this new technology to reduce costs for their clients and provide better customisation and service.
How is fintech impacting traditional wealth management?
As new technologies emerge and customer needs evolve, there has been increased collaboration between fintech companies and traditional financial institutions, as both seek to leverage each other’s strengths and resources to provide better financial services. The following are some of the key ways in which fintech is changing traditional wealth management:
The increased digitalisation of wealth management services is providing clients with more convenient ways to access their investments and financial information.
Online investment platforms now allow individuals to invest in various assets such as stocks, bonds, mutual funds and cryptocurrencies while providing users with valuable information on investment research, real-time market data and other investment tools to help them make more informed investment decisions.
Robo-advisors were introduced in the UAE in wealth management in 2017. The first robo-advisor to launch in the region was Sarwa, a digital wealth management platform that uses algorithms to create personalised investment portfolios for clients based on their risk profiles, financial goals, and investment horizon. Since then, others have entered the market, including Wahed Invest, a Sharia-compliant robo-advisor launched in 2018. This technology is helping wealth management companies complement their services and provide a more data-driven service to clients.
3. Blockchain technology
Blockchain is also beginning to influence wealth management in the UAE in several ways. For example, in 2017, the Dubai Multi Commodities Centre (DMCC) launched a blockchain-based trading platform for precious metals, which allows investors to buy and sell gold, silver, and other metals securely and efficiently.
The UAE government has also launched several initiatives to digitise assets, including real estate and other investments. Using blockchain technology, these assets can be easily bought, sold, and transferred, making the investment process more efficient and cost-effective while reducing the risk of fraud and errors. Blockchain technology also provides a secure, tamper-proof ledger that can be used to track and verify transactions, which improves transparency by providing investors with a clear record of their investments and the associated fees and charges. Other processes can also be streamlined significantly with blockchain, such as the automation of record-keeping, compliance and reporting functions. Overall, these advancements are helping to make the investment process more efficient and reducing the risk of errors or delays.
4. Open banking
Open banking is a financial concept that allows third-party financial service providers to access bank customer data through Application Programming Interfaces (APIs) in a secure and regulated manner. This approach has been gaining traction in the UAE and supports wealth management in several ways. It helps wealth managers access a vast amount of customer data, such as spending habits, investment history, and account balances, which allows them to gain deeper insights into clients’ financial behaviour and provide more tailored financial advice. Open banking also allows them to integrate clients’ bank accounts with their investment portfolios, providing a more holistic view of clients’ financial picture and allowing for better portfolio diversification and more personalised investment strategies.
5. Automated portfolio rebalancing
This is a fintech industry solution that uses algorithms to help investors maintain their desired asset allocation over time. It involves periodically adjusting the weightings of different assets in a portfolio to ensure they remain consistent with the investor’s original investment strategy.
For example, suppose an investor has a portfolio consisting of 60% stocks and 40% bonds. Over time, the stock market may perform better than the bond market, causing the stock portion of the portfolio to increase to, say, 70%. This change in allocation can increase the investor’s overall risk, as they may be overexposed to the stock market. To address this issue, an automated portfolio rebalancing solution would sell a portion of the stocks and buy bonds to return the portfolio to the desired allocation of 60% stocks and 40% bonds.
The benefits of automated portfolio rebalancing include reducing the amount of manual effort required to manage a portfolio, minimising risk, and ensuring that the investor’s investment strategy remains on track. Many robo-advisors and online investment platforms offer automated portfolio rebalancing as a key feature.
6. Digital identity verification
The UAE Pass is a digital identity platform launched by the UAE government that enables residents and citizens to access various government and private sector services through a single digital identity. In the context of wealth management, the UAE Pass is helping to:
- Simplify identity verification and reduce the risk of fraud.
- Enhance security by protecting users’ personal information.
- Streamline access to wealth management accounts and help execute transactions faster and more securely.
- Provide a single digital identity that can be used across all platforms and services without the need for multiple logins and authentication processes.
Financial markets worldwide are becoming increasingly complex, with greater regulatory oversight and more variety in the range of investment options available. This makes evaluating risk factors and selecting the best investment portfolio difficult to navigate alone.
Fintech addresses these challenges and enables wealth management providers to improve their service offerings by automating routine tasks, providing insights into clients’ investment behaviour, enabling digital communication, customising investment products, and improving risk management capabilities. These benefits are then transferred to clients who receive a more personalised and efficient service that makes it easier for them to manage their investments and financial planning.
Fintech will undoubtedly play a large part in the future of wealth management, and those who can adapt and incorporate it into more traditional methods of financial management will be best positioned to leverage its full potential.