Wealth Management is More Democratized than Ever, But Should it be?

Removing barriers

The biggest barrier to investing has always been a lack of financial education. More financial publications are targeting investing outsiders than ever before. Access to easily digestible financial news, information, and trends through the likes of daily newsletters, podcasts, and even one-minute TikTok videos has proliferated investing information to the point where people no longer have any excuse not to try investing for themselves. Analysis that was out of reach 10 years ago now is available on cell phones. Thanks to the spread of this information, the intrigue of new businesses – especially since COVID hit – and tools like Acorn which let you invest small amounts of disposable income, excitement for investing has grown.

Agile investing

This has allowed the market to continue to grow despite supply-chain issues, as there is a willingness and an eagerness for new investors to dive in quickly, taking advantage of interesting opportunities and helping new ideas grow quickly. Democratization helped established wealth management firms. With more of the populace believing that investing is no longer out of reach, there is an opportunity to court these emerging demographics. Technologies like robot investors and asset classes like cryptocurrency can be leveraged to appeal to younger investors.

Welcoming new investors

Financial democratization is empowering. It creates opportunities for more people to try investing and find success, and it allows many people to achieve financial freedom. With all of this available, what place is there for advisors and wealth managers? New technologies are beneficial to both investors and financial institutions, because of low costs and little or no minimums. However, there are a few drawbacks and limitations. As we saw from the GME/AMC debacle, dedicated troublemakers can and will wreak havoc on financial markets. Access to alternative investments such as venture capital, hedge funds, and private equity also still require accreditation with the SEC and a minimum asset worth. Algorithms can't talk you through a strategy or hand hold you through tough times like job loss or a turbulent stock market; advice given on an app is likely intended to convince you to continue using that app. Robots and apps also lack the same level of proactivity and are not suited for needs beyond money management like tax, estate, and business planning.

Going it alone

Democratization places power in the hands of the individual, and new technologies provide information to make decisions. However, sometimes what an investor needs most is a conversation, another voice capable of bringing up options they wouldn’t consider. Odds are, clients are not tax professionals. They don't have the background, experience, or, most importantly, the time to dive in deep and find all the market inefficiencies that a professional advisor could. It can also be harder to have a clear view of a financial decision if you’re not an objective third party. Your financial goals may also extend beyond maximizing returns, and an automated system is not as adept at basic human psychology, such as what worries you or makes you happy. Those systems don’t fully understand risk tolerance, giving recommendations against what is appropriate for certain portfolios.

Help when you need it

As machine learning continues to evolve, so too may these tools' ability to understand goals and make more astute recommendations. Ultimately, algorithmic investing gives clients more than one way to invest, and a more diverse toolkit is more useful and reliable.

Therefore, let’s reframe the question. We shouldn't be asking: “Is wealth management and investing too democratized?” or “Do I need an advisor?” We should instead be asking: “What financial path is best for me?” “At what point do I need help managing my assets?” and “What type of financial advisor or advising do I need?”

Everyone deserves a chance to play the game, but the game looks different to different people at different stages of their investing journey. A professional wealth management firm can help answer these questions and others, such as, “What are my goals?” “What are my needs?” and “Do I have a plan in place to make sure that business stays successful after I’m no longer actively participating in it day-to-day?” If a client’s portfolio is not ready for wealth management, talking to an advisor before they dive in, or dive in too deeply, can still be incredibly useful. Democratization places the power in clients’ hands, but that does not mean they have to wield it all on their own.

Tim McCarthy is managing director, business development for Whittier Trust, based in its South Pasadena, CA office.

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