A recent blogpost by Currencycloud has scrutinised how innovation in the WealthTech market is driving the rise of the neo-broker in wealth management.
The company cited a range of innovations, including micro-investing platforms that enable anyone to enter the stock market to automated financial planning services. WealthTech innovations, Currencycloud claims, are transforming wealth management through the creation of digital solutions.
Using AI and sophisticated algorithms, Currencycloud detailed that embedded finance providers are offering similar services to traditional wealth management companies but at a lower cost and a greater level of flexibility, an innovation that is ‘breaking down barriers’ that had previously made the sector the preserve of high-net-worth individuals.
Currencycloud said, “Traditionally, wealth management companies have been slow to adopt digital technologies, blinkered by the belief that their clients’ needs can be serviced with an account manager led personal service. However, in recent years, financial technology has completely reshaped the wealth management landscape, exposing these legacy players’ lack of foresight and agility.”
Many modern-day financial consumers are more demanding of simple and easy wealth management options that can be accessed at any times. The commonness of smartphones and the convenience they offer has created the neo-broker – which is a WealthTech startup that is disrupting the investment and wealth management sector by developing finance apps that make stock markets and innovative tools more accessible to a wider consumer base.
More than simply disrupting legacy providers, however, the blogpost detailed how the emergence of the neo-broker is also helping to breed a new generation of financially literate investors. Currencycloud gave the example of Freetrade, an investment app that offers commission free trading, which has gained over 800,000 users since its 2018 launch.
However, the company highlighted that setting up a neo-broker is the easy part – the real challenges come on the form of building the partnerships needed to make it work, “To successfully navigate today’s dynamic industry trends – from shifting customer preferences to new regulatory hurdles – and bring your product to market, you will need to partner with a triumvirate of experts: regulation and compliance, execution broker, and e-money/FX providers.”
In addition, many new neo-brokers will face a convoluted process understanding the necessary regulation and compliance requirements, with many of them facing the challenge of finding out whether their product falls under the remit of the Financial Conduct Authority (FCA).
Currencycloud said, “Direct Authorisation with the FCA is the traditional approach to addressing your regulatory requirements, but this can be time-consuming and costly. For this reason, many start-ups choose to accelerate their route to market by becoming an Appointed Representative of a principal firm that is already directly authorised with the FCA.”
To understand this better, the company quoted RiskSave Compliance’s Daniel Tammas-Hastings, “Instead of waiting a year or more to launch, these start-ups are supervised by a regulatory hosting firm, like RiskSave, which has the relevant internal skill base and regulatory permissions – and will be held accountable by the regulator for any failings in the Appointed Representative’s activities. Investors and managers at digital brokers find a great deal of comfort in the reduced execution risk. Good examples of firms using this approach include Lightyear and Emma Financial.”
The process of becoming an Appointed Representative is measured in weeks rather than months, and the regulatory hosting firm with often advise on compliance and operational challenges – lessen the neo-broker’s employee requirements and costs.
The blogpost detailed that another key part of becoming a successful neo-broker is finding execution brokers, who commonly enable start-ups to integrate cloud-based, API-driven brokerage infrastructure into their platform. This forms the basis of any investment experience they design, including trading and investing to roundups and rewards.
What does it take for a neo-broker to be able to offer a global and frictionless investment app? According to Currencycloud, neo-brokers must partner with a scalable cross-border payment and multi-currency specialist.
The company said, “Their full-scale Software-as-a-Service solution provides the financial infrastructure that neo-brokers need to move money across borders as part of their investment experience. This multi-currency account infrastructure dovetails seamlessly with execution broker platforms, allowing users to rapidly collect, convert, pay and manage currencies simultaneously, wherever they are in the world.”
Currencycloud head of business development Alexander Barr concluded that partnering with such a company is a ‘vital step’ when taking products to market.
He remarked, “The ability to move money across borders quickly and transact globally in multiple currencies typically forms the foundation of the WealthTech proposition. Get this wrong and start-ups will be left rudderless. Currencycloud can pave the way to success by taking on the complexity of multi-currency cross-border business on our client’s behalf – so they can simply plug-in and begin their journey.”
Read the full blogpost here.
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