The Digital Transformation of Wealth Management: Cutting-Edge Solutions

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In the last few years, many digital investing platforms have emerged, helping take mutual funds to the masses. Investing in direct plans through these tech enabled investing platforms has been a hot topic and has led to explosive growth in the number of new investors, systematic investment plan (SIP) folios, assets under management (AUM), etc. These growth numbers have grabbed news headlines. What didn’t get highlighted is that investors in most of the direct plans did not continue their SIP beyond 5 years.

As per a report published by CafeMutual.com, only 2% of the direct plan SIPs continued beyond 5 years. On the other hand, 10% of the regular plan SIPs continued beyond 5 years.

SIP investment time horizon: Direct vs. regular plans

(Source: https://cafemutual.com/news/industry/21951-10-regular-sips-and-2-direct-sips-are-over-5-years-older)

Note: The table data is as of 31st March 2021

The above data shows how only 48% SIPs under direct plans continue beyond a year. The number reduces with every passing year and reaches just 2% beyond 5 years. So, the digital investing platforms have helped increase the reach of mutual fund schemes. The indices like the Nifty 50 have delivered good returns in the long run. But, with much shorter investment tenures, most investors have not benefitted from these good returns.

The challenge with most digital investing platforms

Most digital platforms today are ‘return-centric’ and transactional in nature. They onboard more investors in a short period of time by recommending mutual fund schemes that gave the highest returns in the last one year. However, data shows that most funds that topped the performance charts in the last one year did not figure in the top 5 list in the subsequent year.

Investors chasing returns by making investment decisions based on recency bias or herd mentality are often left disappointed. Also, most digital platforms advocate the Do It Yourself (DIY) approach with little or no human interaction. With this approach, when markets are volatile or fall sharply, many retail investors panic and redeem their investments, ending up with losses as there is no one to guide them.

Due to the lack of human handholding, most digital platforms fail to address the greed and fear emotions of investors. By being ‘return centric’, they encourage greed, and with no human intervention during volatility and market falls, they fail to assuage investor fear. It leads to investor expectations not being met, and they redeeming the mutual fund schemes as well as exiting the digital platform.

How can digital platforms transform wealth management?

Digital platforms can transform wealth management with the combination of technology and human handholding. A qualified, knowledgeable, and trained investment expert can understand the client and their requirement, set the right expectations, suggest the right investment product, and handhold till the financial goal is met. The investment expert can take a ‘goal-centric’ approach rather than the ‘sales-centric’ or ‘return-centric’ approach taken by the DIY digital platforms.

The technology should enable an interactive model wherein the investment experts and investors can come together, chalk out a customised goal-based financial plan and make investment decisions jointly. The customisation can include making a cash flow statement, analysing personal finance ratios, listing the financial goals, understanding the risk appetite, investment time horizon, etc. and accordingly suggesting the mutual fund schemes for investment.

During market volatility and falls, the fear emotion can run high among many investors. The investment expert can handhold the client during such times and explain market cycles by presenting data showing a recovery and a new all-time high after every fall. Also, investments mapped to financial goals encourage clients to stay invested for the long term till they are achieved.

The digital transformation of wealth management

An ideal digital wealth management platform should take a ‘goal-centric’ approach and provide investors with hyper-customised investment solutions. It should enable a unique combination of technology and human support. The investment expert should co-own the financial goals with clients and handhold them throughout their investment journey, right from identifying financial goals till they are achieved.

FinEdge is a holistic investor platform that combines all the above features and helps investors create long-term wealth. Its investment experts, with the proprietary Dreams into Action (DiA) strategy, provide hyper-customised investment solutions in order to build investment resilience. A resilient investor can stay invested even during market volatility, benefit from compounding in the long run, create wealth, and accomplish financial goals.

Harsh Gahlaut, Founder and CEO, FinEdge. Views are personal.