What is digital wealth management?
In traditional finance, wealth management has for many decades remained the realm of the few and the wealthy, while for the many, the only “savings” option has been to entrust their money to a savings bank account, which currently pay ultra-low interest rates in many countries across the world. However, this is all changing with the advent of digital wealth management which is making saving and investing simple and accessible to all demographics and all budgets.
Digital wealth management is an investment solution that utilizes digital tools to offer investors a wide range of savings and investment products. This could include savings plans investing in stocks, exchange-traded funds (ETFs), or digital assets, as well as DIY platforms where investors can choose their own allocations, and personalized portfolios. The key element is the use of technology to offer solutions that help clients manage their wealth and grow it for the future.
In a similar way to decentralized finance (DeFi), digital wealth management is in a position to democratize finance by making investment solutions available to entire populations via a website or an app. This opens up investment opportunities to anyone wanting to begin saving for the future – often from as little as €1 (or equivalent), as is the case with new savings plans offered by Scalable Capital. A European digital wealth manager, Scalable Capital offers investors the opportunity to save towards stocks, ETFs and cryptocurrencies starting at just €1 and free of order fees.
This eliminates the high barriers to entry usually associated with traditional wealth management, where services are often available only to those with assets above a certain threshold, such as a minimum of $100,000.
Usually, there are country-specific rules around what citizens and residents are able to invest in. For example, some ETFs are listed in Europe and available to European clients only, while others are listed in the US targeting US-based investors. As a result, digital wealth managers often have country or region-specific propositions or their offerings might differ depending on where the client is based.
What does digital wealth management involve?
A digital wealth solution allows clients to go through the entire setup process for their accounts from the comfort of their own homes via an app or a website. Usually, this is a streamlined process that takes just a few minutes and requires answers to several questions to help profile the client’s needs, expectations, and risk tolerance. This is an important step, as it dictates the solutions that will then be recommended to each client.
Digital wealth management takes many forms, making it possible for individuals to pick their own investments, but also providing portfolio recommendations based on algorithms that can take away the stress of watching the markets and engaging in trading strategies.
Digital asset platforms are a form of digital wealth management that allows customers to deploy their assets into strategies that earn a regular income over a long time horizon (a year or longer), often with a relatively low barrier to entry. For example, Yield App’s clients need only deposit a minimum of 100 USDC/USDT/DAI, 0.03 BTC, 0.1 ETH, or 200 YLD into their wallets and pick a suitable portfolio to start earning up to 14% p.a. on their digital assets.
Digital asset platform offer options for both risk-averse customers through stablecoin strategies and for those willing to take on higher risk via allocations to other coins or tokens. Stablecoins are cryptocurrencies pegged to fiat currencies, such as USD Coin (USDC) and USD Tether (USDT), both pegged to the US dollar. Stablecoin strategies offer annual interest rates much higher than traditional bank savings accounts, with Yield App offering up to 14% p.a. USDT and USDC.
However, it's important to be aware that although stablecoins are a lower volatility alternative, they are not without risk. The golden rule for any investor is to never allocate assets they cannot afford to lose to digital asset strategies and always keep in mind the potential risks.
Equally, however, digital wealth management presents an innovative opportunity for high net worth individuals and institutions, with certain funds offering exposure to digital assets for investors who have more assets to commit. An example is Pantera Capital in the US, which has a minimum investment of $100,000 for its funds and now manages over $700 million in assets spread across five cryptocurrencies.
There are various funds available on the market which provide exposure to all areas of the cryptocurrency ecosystem, from illiquid venture capital assets to more liquid digital assets such as Bitcoin and other tokens.
These types of funds are often designed to mitigate some of the volatility associated with digital assets such as Bitcoin and Ethereum by employing a strategy focused on downside protection. Having an expert team behind the fund also means the onus is no longer on the individual investor to make trading decisions.
The pros and cons of digital wealth management
Like any investment, digital wealth management has its pros and cons. Being a relatively nascent area of finance, it places a focus on the user experience and easy access to information on one’s portfolio. Often, digital wealth management platforms employ chatbots or other AI-enabled technology to facilitate communication with their clients, making it easy to ask questions, gain reassurance or simply keep track of one’s assets.
In addition, a digital wealth strategy can help investors pick a fund that suits their level of risk and create a diversified portfolio to mitigate the risks inherent in investing. It is usually a far more affordable service than that of a traditional wealth manager, with many digital solutions having fixed management fees. As mentioned above, digital solutions often have much lower barriers to entry, opening up saving and investing strategies for all.
One sometimes cited disadvantage of digital wealth management offerings is the lack of a human connection, with most or all client interaction and trading decisions outsourced to a computer algorithm. For some clients, this can form an important part of their wealth management strategy, and the question of whether the pros outweigh the cons is a personal one.
However, with continuous improvements in technology and a changing investor demographic, it is likely that digital wealth management in its own right can continue to both grow and complement existing wealth management models. The rise in popularity of passive and automated investing is opening up the world of savings and investments for those who have traditionally been left behind. And any innovation that democratizes finance is surely positive!