Culture is changing at breakneck speeds, and with it, people’s aims and ambitions. Strong trends amongst the young, are not only disrupting the whole idea of working for a living, but also what it means to accumulate wealth.
A new wave of disruption is hitting wealth management, a part of financial services traditionally reserved for the wealthy who could afford the steep fees associated with having a dedicated advisor.
We sat down with Ramtin Matin, Head of Innovation at Sparebank 1-SR Bank, the second largest regional bank in Norway with approximately 220 billion in gross lendings and 350 000 retail and corporate customers, to find out what the democratization of wealth management is all about and the exciting opportunities it opens for the rest of us.
Ramtin, as Head of Innovation you have your hands in a lot of different pies but today, we’re going to be focusing on the democratization of financial services. Let’s start by defining what is democratization and what’s driving it.
The democratization of wealth management is creating an even playing field for everyone in society. Historically, wealthy people have had opportunities to invest and grow their wealth through instruments that are not accessible to everyone. In the past five years there has been a paradigm shift, making those instruments available to the broader part of the public. Distributed ledger technology and the crypto space are good examples of how ordinary people can invest in instruments that are highly lucrative, on the same conditions as wealthier segments.
Is this driven by technology or is there a problem at the core that this is trying to solve?
Technology is making it more accessible for you and me to go and invest in these type of instruments. But the root cause is the inequality of the access to wealth building instruments. Some events related to companies like Game Stop, where hedge funds investment strategies were perceived as unfair towards the broader public, have resulted in people joining forces to even out that playing field. The sense of inequality is in my opinion the true core issue.
But where does this inequality exist?
Many have the perception that inequality within the financial system is only tied to parts of the less developed world, where the cost of banking can be close to 20-30% of your income and where people don’t have access to services we take for granted, such as card, payments and account infrastructure. But inequality also exists here, on another level, within the financial service spectrum.
As an example take equity raising for startups. Most of the value creation in companies happens when the startup moves from its infant stage, to a scale-up and ultimately the stock exchange. It is usually not possible to invest in a startup from the very beginning, unless you are a family office, or you have some connections to these companies. The lack of access to these opportunities is part of the inequality which some companies are trying to to solve.
These problems are not new, why is this trend picking up momentum now?
We are seeing cultural trends like the financially independent retire early movement (FIRE). It boils down to becoming financially independent ahead of the predicted retirement age, which requires savings and a completely different view on spending. People want to be independent from the financial system. There is an us versus them culture which to a certain extent I can understand. It is this current type of mindset that is fuelling the democratization of wealth management.
For the past 30 years there’s been a focus on getting people on the property ladder as a way to build long term wealth. We now see a similar trend for getting people on the investment ladder through democratization.
Why would customers choose new types of investment instruments over equity on real estate property?
I’m not a financial advisor but i think it is important to have some type of diverse portfolio. The advantage of these type of tools is that they bring down market barriers for entry. In the Nordics the housing market soared for the past two years but it now has a more moderate outlook. Price hikes increase barriers for new entrants. For a young couple who wants to settle and buy an apartment, it can be very difficult to get into the market. The democratization of wealth and savings could become a steppingstone towards that, but inherently there is risk. There are some interesting ideas on how the democratization of finance could be a solution to broader societal issues like access to property ownership.
As technology brings down those barriers and automates banking functions, will investment companies and banks continue to optimize the physical channel?
This is an extremely good question, as these two things are usually put aside as opposites. I think there’s room for both. I believe that we need to develop the physical channel as the younger generations, used to screen interaction, are seeking for validation from a professional who has looked over their finances and can tell them things will be fine. You don’t get that type of trust building foundation with digital tools yet. It takes a long time to build trust and it’s easier when you’re sitting across one another rather than interacting through a screen. This is a big question mark for a lot of the new fintechs.
What are the main opportunities that democratization of wealth management is opening for investment companies and for fintechs?
There are possible synergies between these two. Investment companies have knowledge and trust as well as a distribution network. Fintechs and those who provide the tools, products, services, and business models for the democratization can make them accessible to incumbents, so why not collaborate on those two areas? It’s an ideal match, but it requires that each party tries to understand one another. There is much to be gained by collaborating towards the end user. Ultimately the goal is to provide better financial services for everyone equally.
