Get Ready for Wealth Management and Asset Management Democratization

I just stumbled across this pretty interesting article about the ongoing mutual fund fee dispersion and especially the quite evident decrease in mutual fund and ETF fees. Some past academic research, such as Iannotta and Navone (2012) and Haslem (2015), has already pointed out that there is no straightforward answer to the question why mutual fund fee dispersion exists, and whether there is an overall trend towards lower fund fees. But there is substantial evidence showing that mutual fund expense ratios have been in decline for the past two decades and there is a similar phenomenon going on in both actively managed and index mutual funds. 1)See: Collins, S. & Duvall, D. (2016). “Trends in the Expenses and Fees of Funds, 2016 ICI Research Perspective 23(3) Furthermore, as Cooper, Halling, and Yang (2009) argue, there is “an important and multi-dimensional puzzle regarding the fees charged in the mutual fund industry.” Hu, Chao, and Lim (2016) demonstrate that investor sentiment has a considerable effect on mutual fund fees and performance.

On the other hand, as Micah Hauptman (2016) reports, many investors are paying too much for their mutual fund investments and are missing out almost identical investment products that might be better regarding their overall fees and performance. We would expect that intensifying competition would drive down prices but as Célerier and Vallée (2013) have argued, under certain conditions “[financial] complexity increases when product market competition intensifies” and “the more complex a retail structured product is, the more profitable it is for the bank.” Strategic obfuscation is not an exception, but the rule of the competitive game as Gu and Wenzel (2012) have pointed out. Mutual funds, as well as various other retail savings and investments products, seem to escape the law of one price, i.e. “in the mutual-fund industry, there are often significant price differences for similar if not identical products.” 2)See: Carlin, B. I. (2009). “Strategic Price Complexity in Retail Financial Markets“. Journal of Financial Economics 91(3): 278-287; Kalayci, K. (2011). “Price Complexity and Buyer Confusion in Markets“. Netspar Discussion Papers DP10/2011-082 As Choi, Laibson and Madrian (2010) have experimentally demonstrated,

“Despite this unbundling, subjects overwhelmingly failed to minimize index fund fees. Instead, they placed [a] heavy weight on irrelevant attributes such as funds’ annualized returns since inception. Highlighting these misleading historical returns caused student subjects (in one of our randomized experimental treatments) to chase those returns even more intensely, despite the negative future return consequences such behavior had. Even subjects who claimed to prioritize fees in their portfolio decision showed minimal sensitivity to the fee information in the prospectus. […] In the real world, this problem is likely to be exacerbated by the financial advisors whose compensation is increasing in the fees of the mutual funds they sell to their clients. […] Our results suggest that such noise helps account for the large amount of price dispersion in the mutual fund market.” 3)On the inherent complexity of the financial markets, see: Schwarcz, S. L. (2009). “Regulating Complexity in Financial Markets“. Washington University Law Review 87(2): 211-268

Local and Foreign Players Enter the Competitive Market: Index Funds and Digital Wealth Management

As I have already previously pointed out, both the rise of automated investment solutions and passive investing and indexing, have fundamentally altered the way that retail investment management is being conducted throughout the wealth management industry. It is true that the disruption is still very much work-in-progress, but for example, in the Nordics, we have already seen how incumbents are entering the automated investment services markets, e.g., Nordnet’s Robosave or Danske Bank’s new digital wealth management solutions. At the same time, it should not be forgotten that Swedish Avanza launched index-tracking Avanza Zero in 2006 and Nordnet Bank launched zero-fee Pan-Nordic Superfunds in 2014. Zero-fee funds have been a fascinating case study of how incumbent service providers are seeking to attract new clients and to reduce the probability of existing clients moving their assets somewhere else.

Avanza’s and Nordnet’s zero-fee funds are pretty neat examples of loss leader pricing, and as these index funds are bought and sold from your Avanza or Nordnet managed brokerage account, they act as a way to create a new layer of commitment. These kinds of products create some friction for the client especially when the client might want to move his portfolio to another brokerage firm, and as for example Nordnet’s Superfunds cover pretty much the whole Nordic markets, they have turned out to be pretty compelling to keep retail investors locked in. Yet another example of this kind of mindset is the Finnish investment services company Seligson & Co which has not historically been distributing its own index funds through outside partners and has instead focused on strengthening its brand as an efficient asset manager for retail segments and institutional clients on its own.

At the same time, there has been a growing space of Nordic mutual fund companies launching various low-fee index funds and ETFs. For example, SPP Fonder, SEB, Swedbank, Xact Kapitalförvaltning AB, Nordea Funds and Handelsbanken have already entered this market, and currently, various Nordic wealth and asset managers utilize low-cost index funds and ETFs as part of their investment management. 4)Most US-domiciled ETFs are no longer available for most European retail investors due to MiFID II.

It’s not only ETFs, index funds and passive/active index investing that changing the competitive landscape and shifting the client demands but also, the pace of digital change has increased. New opportunities, such as new value propositions, digital experience, rapid innovation and advanced analytics, are changing the landscape. There are already around twenty companies operating in the automated investment solutions and digital wealth management landscape, and I expect that there is a lot more to come. In Finland, for example, Evervest, a small robo-advisor established in 2015, has already pivoted its pricing several times. If an investor’s account is valued under €5000, the total advisory fee is 0,75% annually or 3 euros per month, and the full advisory fee is 0,45% for investment account balances over €100 000. 5)These fees are not so much lower for small account balances than in the case of, for example, Nordnet’s Robosave, and as plain vanilla robo-advisors get commodified, I expect fees to decrease even further as has already happened in the US. Swedish Avanza has already attacked Nordnet with the lower fee structure for its Avanza Auto. 6)Taaleri has just announced that they will acquire Evervest.

I have previously independently estimated that the Finnish digital wealth management market, including advanced automated investment solutions and robo-advisors, is now approximately €200m (AuM) and Statista has published a pretty similar figure (€213m). 7)This is a pretty conservative estimate and its based on some publicly available data points and extrapolation. I guess that there will be a steep increase in AuM and userbase in coming 3-4 years, and this is based on my view that there is still a lot of people to convert from traditional online brokerage and wealth management towards low-cost, easy-to-use digital solutions. 8)Case study of LendingClub penetrating areas that may be underserved by traditional banks: Jagtiani, J. & Lemieux, C. (2018). “Do Fintech Lenders Penetrate Areas That Are Underserved by Traditional Banks?“. Supersedes Working Paper 17-17.

It hard to estimate exactly how many people around the Nordics take advantage of digital wealth management solutions but Statista estimates that there are approximately 40 000 users in Sweden, Finland, Norway, and Denmark combined. In 2022 this number is estimated to be around 260 000 users. In 2017, Accenture Strategy published a paper based on a survey of retail investors to better understand what Nordic investors want, and somewhat surprisingly “51 percent of all investors and up to 81 percent of under fifties said they’d be willing to invest part of their wealth into fully digital services based in their home country.” There are some strong signals pointing out that investors are willing to shift from traditional wealth management services to new digital solutions, but it is not clear if Nordic wealth managers are really ready to take the leap of faith and move onwards. The rise and growth of European robo-advisory space are evident, and it is already possible for Nordic customers to become customers of non-Nordic robo-advisors such as ETFmatic.

There are no multi-billion AuM Vanguards, Schwab Intelligent Portfolios, Betterments or Wealthfronts in the Nordics yet, and to be clear, the robo-advisory industry is still a minuscule fraction of the Nordic wealth management market. There has been some M&A activity, e.g., Swedish Pensionera raised SEK 12 million (€1,2m) from Optimizer Invest in 2016, Norwegian Sbanken (Skandiabanken) became the largest shareholder of Quantfolio in 2017, and Finnish Taaleri Wealth Management acquired Evervest in May 2018. And there is no reason to expect that this is just the tip of the iceberg as even digital wealth managers need to grasp the reality of what’s going on in the world of Six D’s; while most wealth managers are still doing plain vanilla digitization, namely utilizing digital technology to access, personalize, mix and create, it is deceptive to suppose that exponential growth will not hit the wealth management industry soon enough. We have already evidenced that industry leaders, such as Vanguard, Charles Schwab, Betterment, and Wealthfront, are disrupting the traditional wealth management production processes and demonetizing distribution for the retail markets. There are already some automated investment solutions available, such as M1 FinanceWiseBanyan, Motif, Schwab Intelligent Portfolios, and Wealthsimple, that offer a considerable amount of functionalities for free until a certain threshold is reached or the investor wants to have some extra value-add services. So it seems that some companies have already demonetized and democratized wealth management for some customer segments, and I expect this trend to hit the Nordics too because we have already witnessed the birth of zero-fee index funds. I don’t want to remind high-fee online brokers have already tried to adapt to the world of the new generation of discount brokers like DeGiro and Lynx Broker that are challenging the existing competitors to reconfigure their value propositions.


Nordics is a pretty small market for global wealth managers and asset managers to enter directly and immediately. My view is that the big wealth management and asset management players are not going to come to Finland any time soon but instead we might see various forms of partnership and other kinds of ways the marketplace, e.g., asset managers utilizing more advanced D2C distribution models as we have already witnessed in the UK in the case of Vanguard entering the market and in Denmark where Saxo Bank partnered with BlackRock.

Wealth management, financial advisory, and asset management happen to be a very lucrative business for many incumbents, and as Inderes’ analyst Sauli Vilén has pointed out in the case of Nordea Asset Management (fully owned subsidiary of Nordea Bank), the significance of these business areas is growing as non-interest income is becoming more and more important for many banks. It’s important to acknowledge that the preferences and needs of newly discovered client segments – such as Millenials and women – are pretty different from the past generations. In the Nordics, OP Financial Group launched a new kind of fully digital insurance service called OP Nano Vakuutus in last May, Nordea partnered with Apple Pay in the NordicsDNB has been pushing their peer-to-peer payment solution for over three years and several other incumbents are doing everything they can to create new seamless and engaging services for their clients. At the same time, new players like neobank Revolut have already entered the Nordic markets, and there is a bunch of new digitally-focused local challengers incoming. 9)Skinner, C. (2017). “Neobanks Don’t Need to Be ‘Real Banks’ to Compete in Banking“. Chris Skinner’s Blog

Paolo Sironi (2016) has emphasized that digital technology and robo-advisory poses three kinds of distinctive threats to asset managers, namely commoditization, inefficiencies of the open architecture and rising client awareness. As I have been closely following the evolution of digital wealth management and robo-technology for over a year now, I can only concur with Sironi’s observations from two years ago as the new generation of digital wealth management relies heavily on ETFs and similar kind of portfolio management methodologies, big asset managers are moving towards new kind of digital propositions (i.e., there is a definite trend towards D2C and hybrid approaches as evidenced by Vanguard, Barclays, Santander, UBS, and Fidelity Investments) due to regulatory demands and apparent hindrances caused by the existing legacy systems and applications, and now even retail customers are becoming increasingly aware of the apparent limitations of traditional active investment management.

To summarize: I expect that we will see new digital wealth management players entering the Nordic markets, but these will most likely rely on different kinds of partnerships and value propositions as the markets are pretty saturated. It will be a challenge for (new) financial advisors, brokers and wealth managers to gain new clients despite robust asset and revenue growth. 10)Beardsley, B. et al. (2017). “Global Asset Management 2017: The Innovator’s Advantage“. BCG, 11.7.2017 Big players will continue to dominate wealth management, asset management and private banking in the Nordics. Fees for various products will most certainly continue to fall, but this trend does not affect every player the same, i.e., pricing models differ considerably between new and existing customers and from one service provider to another.

Incumbents will continue struggle with their traditional onboarding and inboarding proceduresredesigning their financial and investment advisory practices to suit the needs and demands of their customersupgrading, hollowing out and/or removing legacy systems continue to pose significant challenges and it is becoming increasingly important for big players to move away from generic everything-to-everybody value propositions towards more customer-centric approach. In Finland and Sweden, both new players have emerged as well as existing service providers upgrading their offerings, and as one might expect, new kinds of partnerships still appear. Nordic advisors and wealth management providers need to find new ways to engage their clients as well as find new ways of working, retain talent and grow their business (in)organically. It’s becoming increasingly crucial for incumbents to find better ways to communicate meaningfully with new client segments such as Millenials and women and to make sure that product and service development is able to create right kind of offering for these clients.

Globally financial markets, especially stock markets, have been going strong almost every year since the 2008 global financial crisis, and as one might expect in the case of many asset and wealth managers, assets under management have been increasing along the way. Wealth management has been a hugely profitable business although players are already facing considerable challenges due to a multitude of factors, and I don’t see real reasons to expect that the external environment will be drastically more explicit to navigate any time soon.

Photo creditJESHOOTScom / CC0 Creative Commons

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