Wealthtech funding had ‘record-shattering’ 2021

The world’s largest firms are betting that new tools from wealthtech providers, ranging from AI to robotic process automation and blockchain systems, can help slash costs while increasing assets.

Wealthtech deals hit record highs last year, and the explosive growth is expected to continue as clients demand improved technology from their financial advisers.

The biggest transactions from 2021 included mergers and acquisitions and funding rounds from some of the top financial services firms, like J.P. Morgan Chase & Co., Vanguard Group Inc. and Robinhood Markets Inc. Much of the capital came from custodians, brokerages and asset managers looking to position their firm’s technology and service offerings for the future, according to research released this month by Echelon Partners.

“Last year was a record-shattering year,” said Barnaby Audsley, vice president at Echelon Partners and the author of the research. “There’s huge appetite and interest from investors, and the M&A community, toward tech solutions for wealth management industry. The numbers reinforce that trend.”

Robinhood raised $1 billion in fresh funding in January amid the GameStop Corp. stock trading frenzy that saw retail traders buy up the stock along with a few dozen or so other so-called meme stocks. The new capital was required to keep high-volume meme traders on board during record trading activity.

The significant rise in retail investing, driven by increased time at home due to Covid-19 and the rise of online investing forums, helped fuel transactions involving companies that catered to these new retail investors via online brokerages or robo-advisers, according to the research, which cited this year’s Wealthfront Inc. acquisition by UBS Group for $1.4 billion.

The most notable deals from last year include Morgan Stanley’s sale of ETrade’s custody business to Axos for $55 million in April, the Orion Advisor Solution purchase of HiddenLevers in March and Vanguard’s acquisition of JustInvest in July.

The increased attention to wealthtech partly reflects the ongoing consolidation in the RIA market. As advisory firms grow in size and scale, they make perfect targets for wealthtech firms to distribute their products, Audsley said.

While fintech has traditionally focused on independent broker-dealers, the recent consolidation has created new opportunities for providers to sell their tech tools to RIAs as an additional source of revenue.

“If you’re trying to sell [software] to the marketplace, you have to have really good distribution,” Audsley said, “otherwise it’s like wrangling cats.”

The Wall Street incumbents are also showing a heightened appetite for tech. The world’s largest banks are betting that new technology, ranging from AI to robotic process automation and open-ledger blockchain systems, can help slash costs while increasing customers and client assets. Bank of America Corp. reportedly spends around $14 billion a year on technology and operations, while JPMorgan CEO Jamie Dimon recently announced the bank’s intention to invest more than $12 billion in technology this year.

“The incumbents are using M&A as a tool to speed up the introduction of cutting-edge solutions that are more in line with what you’re seeing in other industries,” Audsley said. “We’re definitely seeing more of a buy than build approach.”

While the wealthtech segment historically has been fragmented, the new funding is trying to bridge those gaps and construct an end-to-end platform that can make advisers’ and investors’ lives easier, according to the research.

“Netflix has customized the way you browse various movies and content, and Spotify customizes how you listen to music, but there’s been a lag in wealth management in adopting that sort of tech-enabled customer-service model,” Audsley said. “Overall, the interest is going to come from the end client demanding greater customization and better delivery.”