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Let’s take a big, overarching look at economic growth curves. The value of companies across the old economy may be stable, but it is not going to grow much. In contrast, the value of companies in the digital economy can grow on a quadratic curve, albeit with high volatility. It is no coincidence that the growth of Internet traffic is also exhibiting a quadratic curve. I firmly believe that the value of companies in the digital economy will expand in proportion to Internet traffic. As we focus on the digital economy, our shareholder value has also increased steadily along a quadratic curve. I remain confident that this growth will continue into the future - Softbank CEO Masayoshi Son.
Introduction
Today I am going to tackle a topic that I am very passionate about. The wealth and asset management industry and particularly how technology can drive a better product market fit for incumbents in the industry. Ultimately, it could turn out that the incumbents will be left behind and new digitally native players will take all the market share. The article will start with an overview of the current asset management/wealth industry in Africa and will be followed by a discussion on the mega-trends that will shape the wealth industry followed by a review of some of the companies innovating within the wealth management space.
The basic premise is that the current wealth management industry in Africa suffers from a product-market fit problem. On the one hand, poorly performing local stock markets have a direct impact on the quality of the product offering; whilst on the other hand, a brick and mortar legacy significantly impacts distribution.
Wealthtech generally refers to technology that aims to improve the provision of wealth management and investment services. I view it to be a sub-set of Fintech. Wealthtech could include back-office services such as execution, settlement and custody as well as front-office services such as consumer apps, distribution and marketing. Elements such as robo-advisory and the inclusion of artificial intelligence also fall under the broad umbrella of wealthtech. It joins fintech and insurtech as one of the many portmanteau that we’ll all have to live with.
Overview of Current Wealth Industry in Africa
The asset management industry in Africa is diverse in terms of size and complexity. South Africa has one of the most advanced markets with Assets under Management (AUM) totalling US$ 155 billion as of June 2020. Precise figures on total AUM in Africa are difficult to come by but estimates by BCG and AfrAsia estimate the size of the wealth sector to range between US$ 1.6 trillion and US$ 2.1 trillion. This is a very small share of the global wealth management sector that is estimated at US$ 226 trillion by BCG. Nonetheless, Africa and Asia have shown the most robust growth.
Source: Boston Consulting Group
Looking at the Mutual Fund industry, the Nigerian market has AUMs of approximately US$ 4.0 billion with the Kenyan market just above US$ 1.0 billion as of Q4 2020. The Nigerian market has grown at a CAGR of 43% over this period. South Africa therefore is significantly bigger than both markets in terms of size and also has a wider array of product offerings. The Kenyan market is dominated by money market funds whilst mixed funds dominate both the Nigerian and South African market.
Zeroing in on Kenya, one notes that the industry is largely set up in the industry 3.0 format. Industry 3.0 is a mental model I find useful for analysing a firm's interaction with its clients and its business structure. It is underpinned by 4 key factors;
Standard product development largely unchanged over a long period;
Competition on price and brand positioning - You often see money market funds competing on the interest rate offered;
Segmentation of customers into large “homogenous” groups;
Built for physical distribution and client relationships as well as manual on-boarding;
These same factors have been alluded to in previous posts about core banking platforms with reference to both banks and core banking system vendors as well as an older post about the insurance industry. The industry is thus set up to package investment offerings sourced from bond, equity and property markets into standardised products sold to customers. These products are mostly in the form of unit trusts, Real Estate Investment Trusts (Reits - although these are rare) and discretionary funds targeted at the more affluent.
In addition, when analysing Kenya and extrapolating into other markets - the investment world from the client perspective includes alternative investments such as Savings and Credit Cooperative Organisations (Saccos) and Rotating Credit and Savings Associations (ROSCAs). The latter are known as “chamas” in Kenya and “Stokvel’s” in South Africa.
The diagram below shows the typical industry structure especially how products are packaged and sold to clients. The main players in these markets are large continental giants such as Standard Bank, Old Mutual, Coronation Asset Managers, Allan Grey, Britam in Kenya as well as offerings from various fund groups.
This production framework has been in place for many years and is now facing significant challenges.
Lack of Raw Materials
If you consider bond and equity markets as raw materials that go into the creation of investment products, then the African experience in both markets has been quite poor over the last decade. The charts below show that the three main markets in Sub-Saharan Africa, Johannesburg, Nigeria and Nairobi Stock exchanges have had sideways movement over the last 10 years. The South African market has been dominated by Naspers which accounts for over 20% of the JSE. In Kenya, Safaricom accounts for an embarrassing 63% of the stock market value. In Nigeria, Dangote and MTN account for 36% of the market with the top six companies accounting for 71% of the market cap.
The case of Naspers is an outlier as this valuation growth has been driven by their stake in Tencent which is considered as one of the best investments of all time. Nonetheless, a key theme that has emerged that warrants further discussion is the role of technology in driving the value of Safaricom, MTN Nigeria and Naspers.
Source: Trading Economics
Essentially, the performance of the local stock markets which mirrors the European stock markets is partly an outcome of industrial policy and the production structures. These markets are yet to embrace industry 4.0 which is driven by technology particularly AI and data. It is thus noteworthy that the few companies which have technology at the heart of their growth stories such as Safaricom and MTN have done well.
Within all this is the fact that global venture capital is financing the bulk of African start-ups from seed level to later rounds. The story of Paystack being acquired by Stripe is a worrying sign for local stock markets. The large tech companies being built in Africa will likely not end up being listed in Africa.
Additionally bond markets have been affected by various factors. In Kenya, the interest rate cap has paralysed the Central Bank Rate which is supposed to be the monetary policy rate. With a rate cap that is pegged on the CBR, the Central Bank hasn’t had the flexibility to raise the CBR so as to strengthen the currency. This coupled with an open capital account and loose global monetary conditions has lowered rates across the board leading to a peculiar situation where local rates are low whilst the currency is weakening. This has had the impact of putting downward pressure on what investors can get from money market funds.
Poor raw materials naturally lead to poor products and this has been the situation with the African mutual fund industry, particularly Kenya.
Distribution
Compounding the situation described above has been a sub-optimal sales and distribution framework. There is a lot of friction in the mutual fund onboarding process at least from personal experience. Indeed, even bankers who are supposed to be financially savvy don’t even know about money market funds in most cases. The issues stem from;
Nomenclature - most products have complex sounding names that put off the average investor e.g. “Money market fund” whereas this is essentially a savings account;
Once you get over the hurdle of complex naming, you’re met with a very manual on-boarding process;
In many instances, once you finally complete the forms, you’re not assured of having your account set up immediately;
The client relationship model is not goals-based thus reducing product stickiness and brand loyalty;
Some of these issues are a function of legacy technology systems as well as regulation.
Summing it all Up
It’s clear then that the industry is facing significant headwinds from a global macro-trend perspective as well as from an internal operational level. The industry thus has to react to improve both product, internal operations as well as distribution.
In Nigeria, companies like Cowrywise and Piggyvest are acting as distribution apps for existing mutual funds such as United Capital. In Kenya, Chumz has partnered with Nabo Capital and KCB to power behavioural based savings and incentivisation. Chumz is an interesting company with very cool tech. Genghis is partnering with Safaricom’s M-Pesa to launch “Mali” which is set to offer Genghis provided unit trust products to M-Pesa’s vast user base. All these help with distribution but they don’t fix the product.
Mega-Trends Affecting the Wealth Management Industry
Demographics
In Africa, over 60% of the population is under 35 with millennials and Gen-Z’s forming the bulk of the population. The current wealth management industry was designed for “baby-boomers” and Gen-X with physical distribution and a relationship-based approach. Going forward, the target market for the wealth management industry will be digitally native and expect to manage their wealth digitally. The following trends emerge from this demographic shift;
Of course, a digitally native generation will expect to engage digitally with their wealth. This could be augmented by omni-channel distribution;
Women will be a significant market for the asset management industry. Interestingly, in a survey done in South Africa of over 7,000 women aged between 25-44, it was found that over 69% of them stated that they were the primary breadwinners in their family. This is a trend that can be witnessed across the continent and even globally. Women are a significant economic force and this should be considered in product and distribution design. So of course, less golf sponsorships.
In the coming years, there will be a global shift in wealth with the Millenials and Gen-Z’s inheriting a significant chunk of wealth from the Baby-boomer generation;
A trend towards thematic investments with key themes such as sustainability and climate change emerging. Catherine Wood and her firm Ark Investments are the poster child of this trend.
Industry 4.0 Dynamics;
Technology is altering every industry and API’s are re-configuring how companies operate and how products are sold. This article by Segment gives a good overview of how API’s are changing the means of production. The wealth management industry is no different. Big themes such as artificial intelligence, machine learning, big data and 5G will change how wealth is managed.
Big data and AI will enable more personalisation given that everybody’s wealth journey is different. Some people want to become mega billionaires, others want just enough to be able to pursue their passions. Technology will enable multiple data points to be collected so that wealth managers can give a comprehensive product offering. I have a finance background and spent most of my 20s reading copious amounts of value investing literature. Nonetheless, most people lack a basic understanding of personal financial management. The lack of savings and wealth management in my experience is not based on a lack of wanting to save, but rather the fact that for most, finance is intimidating and scary. Very often within the asset management industry, the smart people are talking to each other and not the customers.
Technology will be able to democratise personalised wealth management. This is a purely economic issue. To serve personalised wealth management clients in industry 3.0, you need a certain level of AUM per client to profitably serve a customer. Technology significantly reduces the marginal cost to serve a client. Deloitte estimates that robo-advisors for instance require less than 50% of AUM per client to profitably serve a client vis-a-vis traditional advisory. Technology can also be used to significantly lower costs as well as improve customer experience along different elements such as back-office processing and execution, CRM, analytics and sales. Wealth management will shift towards a more holistic approach enabling for instance, mid-career professionals to better plan for a shift towards entrepreneurship. Goals based, personalised service.
Globalisation and Education
We live in a globalised world and despite some efforts by various governments to stymie the inevitable global integration of societies and cultures, the horse has already bolted. Recent events in Nigeria to block Twitter are a prime example. Millenials and Gen-Z are global in nature and most view themselves as global citizens. Interactions between each other occur on social media platforms such as TikTok and Instagram. Elsa Majimbo is a prime example of globalisation. From her bedroom in an estate in Nairobi, she has managed to create a global brand attracting global lifestyle and fashion brands to her stable. I’m a huge fan.
In a recent podcast on Dave and Dharm Demistify, I explain how globalisation is impacting our generation. We really see ourselves as global citizens. What this means is that a young man in Ruaka, Lekki or Soweto can easily be an expert in cryptocurrency or renewable energy. With such an understanding, this young man would want to invest in these assets and not be limited to industry 3.0 stocks listed on his local stock market. Companies such as Bamboo Invest, Ndovu and soon Chipper Cash and Eversend are enabling Africans to invest in global stocks. This trend will accelerate and the wealth management sector needs to be cognisant of this. Some local players have responded with discretionary funds that invest in off-shore assets, but these are not likely to scale largely because they are structured in a similar take it or leave it industry 3.0 format.
Some Interesting Players within Wealthtech
I have divided the wealthtech space into four different verticals that warrant attention. They are;
Robo-advisors;
Consumer Investment apps;
B2B Wealthtech apps;
Social Trading and Brokerage
Robo-Advisory
As the term suggests, robo-advisory refers to the utilisation of data, Artificial Intelligence and Machine Learning to automate advisory. Some of the earlier players in this space are Betterment and Wealthfront which have grown to have AUMs of US$ 29 billion and US$ 25 billion respectively. The idea is that you can enter your goals, risk profile and personal data such as your age, gender, family size and any other relevant piece of information and the app will automatically create a portfolio that fits your profile. This lowers cost to serve from a commercial standpoint and enables access to financial services at a lower cost. Most robo-advisors charge fees that are a fraction of the traditional players - ranging between 0.1% to 0.5%. Traditional players such as Vanguard have also created their own offerings and companies such as Ellevest are targeted specifically at women.
Consumer Investment Apps
Consumer investment apps are apps that are built specifically to enable retail customers to invest. In most instances they enable customers to buy shares listed in global or local markets as well as ETFs, cryptocurrency and alternative assets. In Africa, Bamboo, Piggyvest and Cowrywise are Nigerian apps that enable clients to easily invest in a variety of assets such as mutual funds and money market instruments. Bamboo specifically enables clients to invest in American stocks through a partnership with Drivewealth which is a B2B wealthtech. Ndovu, a Kenyan company is building an app that will enable clients to invest in global stocks as well.
Globally, players such as Wealtshimple, M1, Alpian and Flowbank are targeted at a more affluent segment and offer a comprehensive wealth management offering that encompasses, trade and execution, robo-advisory and discretionary portfolio management. Locally, companies such as Ndovu can in the future pivot towards providing their services via API to traditional players as well as Retail banks.
B2B Wealthtechs;
B2B wealthtechs are companies offering existing players such as asset management companies as well as Retail banks API-based services across a number of elements along the value chain. These include trade and execution, robo-advisory capabilities as well as customer life-cycle management. Bambu for instance enables banks and incumbent players to offer robo-advisory as well as access to global ETFs through a partnership with Franklin Templeton. I love this podcast from their energetic founder Ned Davis. Seems like a super-interesting guy.
Other companies such as Wealthify, Investsuite and Scalable Capital offer a similar service to Bambu. Aqumon offers both a B2B service as well as a consumer offering. The idea for a local player would be to work on partnering with a global B2B offering and handle local regulatory issues. You’d then offer your customers access to global markets via your B2B partner.
Social Trading and Brokerage
Everybody knows Robinhood from the entertainment that Gamestop gave us. This saga captured our attention and showed us the power of the internet in enabling collaboration. This saga birthed Memestonks and the utilisation of memes as investment memos. Companies such as Robinhood are trading apps that embed social into their product thus allowing average Joe’s to participate in the stock market. Digital stock trading has been around for a long time with companies such as E-Trade pioneering this industry.
Nonetheless, nowadays companies such as Robinhood and E-toro have embedded social deeply into the design of their products. Humans by nature are social creatures. E-toro for instance has a function that enables you to share your portfolio to other traders and they in turn can copy your portfolio and track it. This is the digital equivalent of buying Berkshire Hathaway stocks, you in essence ride the coattails of a legendary investor.
Local players really need to think about this strategy. Africans are by nature social and our investments are largely based on social proof. Think “chamas” and merry-go rounds. All of us have been invited by a friend to attend a multi-level marketing meeting mostly on false pretence. Apps that can couple social but at the same time enable investors to retain discretion about the scale of their wealth could do really well in Africa.
Key Take Outs
The current wealth and asset management sector in Africa needs to improve the product offering by diversifying the source markets as well as improve distribution;
Regulators need to pro-actively encourage alternative investments such as venture capital so as to avoid the complete erosion of local capital markets whilst balancing the capital account;
Retail banks ought to think of embedding wealth management given that it’s likely to increase account stickiness over time. Nonetheless industry 3.0 incentive frameworks will work against this. Until branch managers are incentivised on elements such as DAU/MAU ratio and CAC/LTV then status quo will remain;
Existing wealth managers can improve their offerings by embedding additional aspects such as lending and insurance given that we have one financial life meaning everything is intertwined;
Without being tech-first, a number of incumbents will fall by the way-side in the long-term.
As always thanks for reading and drop the comments below and let’s drive this conversation.
If you want a more detailed conversation on the above, kindly get in touch on samora.kariuki@gmail.com;