63% of asset managers and banks are actively using AI with another 28% intending to deploy it over the next one to three years according to a 2022 Gartner Data Survey. As we look for innovation and the disruption of industries through AI, we believe in order to drive adoption in any vertical you must be able to demonstrate quantifiable improvement in efficiency, accuracy, and performance across data-intensive workflows. 

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There are four critical conditions that will enable new entrants to build in the asset and wealth management category and transform the way financial services knowledge workers complete their jobs.

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Adoption of AI in asset and wealth management 

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1. Lack of investment in the technology

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An estimated 80% of technology budgets in asset and wealth management are devoted to simply "keeping the lights on" and maintaining, repairing, and updating old, legacy technology systems.

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2. Market and macroeconomic forces

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Increased competition and low-cost passive alternative investment products have heightened fee pressure on asset and wealth managers. From 2017 to 2021, the weighted average fee on US equities reduced by 8% and dropped by 7% on global ex-U.S. equities. At the same time, Bain & Company projects a $90T increase in liquid assets from 2021 to 2030 with $40T coming from individuals with $100K–$1m in assets.

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3. Errors and manual processes persist in the industry

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54% of asset managers found that eliminating errors is their biggest data management challenge and 66% of asset managers require an average of six to nine people to process data requests for their business.

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4. Increased investment in technology can lead to better fund performance

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98% of asset managers said they were investing in data science tools for their firms’ investment strategy in the next one to two years and 83% expect investment into data sourcing or alignment to stay the same or increase in the next two years.

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At Unusual Ventures, we have a track record of investing in broader asset and wealth management leaders, including Carta for cap table management and Portrait Analytics for AI assisted investment thesis creation. In this post, we explore four areas where we believe AI will have the greatest potential to drive meaningful change in the asset and wealth management segment. 

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Automating financial research

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Active investment managers and groups spend more than $30bn per year for data and research services and are willing to spend large amounts of money to get any type of investment advantage. V1 of innovation that happened in this sector included companies such as Bloomberg, Alphasense, and Tegus, all of which provided investment analysts with real-time data on any public company. 

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With the rise of LLMs, we are seeing the next wave of innovation in automated financial research and analysis. No longer do financial analysts have to spend days or weeks getting up to speed on a new industry if an LLM can identify the most important information for you. While investment summarization is helpful, it’s something that many platforms will likely be able to do relatively well. To build a category winner in this sector, we believe you must have deep domain expertise and know the type of analysis and information you want to perform on a particular company. In addition, how can you help these analysts identify investment opportunities and ultimately make more money? This is why we were so excited to lead a $7m seed round into Portrait Analytics earlier this year.

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Enhancing customer engagement for financial and wealth advisors

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In a world of increasing AUM and lower fees, wealth advisors are under pressure to deliver more value for their clients with fewer resources while also navigating a difficult macroeconomic environment. 

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Forty-three percent of affluent investors with over $100K in investable assets receive advice from financial advisors, up from 36% the previous year. One-third of Americans are actively seeking help from a financial advisor and six in 10 Americans say their financial planning needs improvement. Financial advisors can and must do better for their clients. Only 56% of customers who use full-service wealth management services say they receive comprehensive advice and 27% of younger clients say they will change advisors and 49% say they’re already working with other firms.

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Given these challenges, financial advisors must enhance and improve their customer services and experiences with AI. They are already using AI to automate their mundane work of creating marketing materials, writing blogs, etc., so they can spend more time with their clients and address their most pressing needs. Morgan Stanley recently partnered with OpenAI to develop an assistant for financial advisors and their support staff. We will continue to see financial advisors adopt AI not only for their workflows, but also to make better financial decisions and better fit the requests of their clients.

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Offering custom indexes and personalization

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There has been a significant increase in investor interest in thematic investing with close to $800bn in AUM invested in 2021 in thematic funds compared to less than a quarter of that in 2015, according to the Financial Times. As investor interest has increased in thematics, wealth advisors are looking to offer more personalized options for their clients. Investment companies such as Blackrock are using NLP to identify and capture investible themes by analyzing different datasets. As consumers become more focused on investing in companies that align with their interests, the focus on thematics will only continue to increase.

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In addition to thematic investing, investment advisors are now using AI to automate their workflows so they can provide more personalized services and decision-making for their clients. A recent Invesco Global Systematic Investing study found that half of systematic investors are integrating AI into their investment process and 46% are using AI to identify patterns in market behavior. 

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In an environment of increasing competition of where consumers can invest their money, wealth advisors are trying to find ways to keep their customers satisfied. By offering more personalized, tailored services to their clients, wealth advisors can do just that. A study by McKinsey found that personalization can improve customer satisfaction by up to 30% and increase revenue by 15% for asset managers. Vanguard also found that personalized investment advice for clients can lead to a 3% in net returns to an investor’s portfolio over time.

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Powering the financial infrastructure for tomorrow 

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One area that has attracted the most investor interest is in the financial infrastructure space, focused on aspects of asset and wealth management that historically have been overlooked by startup entrepreneurs. With the rise of AI and a new macroeconomic environment of higher interest rates and inflation, overlooked aspects of the broader asset management space are being reconsidered. 

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One notable area is in the types of assets investors are most excited about. Investors have begun to pour money back into the bond market and in the fixed-income sector. These two areas didn’t see the same wave of innovation that we saw in the rise of stock market investing with the rise of Robinhood, Wealthfront, Betterment, and others. Of course, these companies have since expanded their investment offerings, but I expect we will see entrepreneurs continue to innovate in this broader segment.

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In addition, the infrastructure that powers much of the investor decision-making is starting to be revolutionized through AI. Historically, the largest index fund providers including MSCI, S&P, and FTSE all developed their own industry classifications systems and risk-factor models to better understand their exposures to different trends and industries. These companies would then map public companies on a one-to-one basis to a specific industry category, often through their primary revenue driver. However, public companies are complex and have multiple business lines and often should be categorized through AI. This is where new industry classification companies have emerged through AI such as Theia Insights who can do real-time mapping of public companies and use AI to map one company to many industry classifications.

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9 out of 10 financial advisors believe AI can grow their book of business organically by more than 20% and 92% of financial advisors acknowledge that their firms have taken steps to act on their AI strategies. While this market is massive and the opportunity to embrace AI is there, only half of firms feel ready to act on their AI vision. This is why we’re excited about the future of innovation in this category!

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If you’re an entrepreneur, operator, or considering building something in this space, we’re always happy to chat and connect at lars@unusual.vc or tyler@unusual.vc. Look forward to speaking with you!