The numbers are staggering. On Wednesday, Fidelity Investments reported that for the 1st quarter of 2021 it added 4.1 million new accounts, up roughly 160% from the same quarter last year. This report comes on the heels of Charles Schwab’s ( NYSE: SCHW) earnings release on April 15th that also showed a dramatic increase in retail account openings with 3.2 million new accounts for the quarter, up 33% over the entire 2020 year. The reasons for the growth are intuitive: low-cost to no-cost trading, one-directional, upward moving equity markets, and a pandemic-catalyzed surge in retail investor engagement. But the consequences of the growth may be less evident, especially as they pertain to fintech M&A, and more specifically, wealthtech.
It was almost one month ago when Fidelity reported that it would be hiring approximately 4,000 new staffers by summer 2021, the majority of which – 2,500 or so – will be client facing, mostly financial consultants and customer service representatives. Fidelity also reported that it will be hiring 300 software engineers and data scientists. Though the former is a clear and direct response to the sheer number of new client accounts, the tech hires, ironically, evidence an industry shifting towards less personnel, more automation, and the expansion of the product suite for online investors. Here’s the description and explanation on the tech hires, directly from the April 7th release: “Increasing the number of technologists creating digital solutions by 10 percent, including full stack software engineers, data scientists, mobile/IOS engineers and architecture. With a nearly 60 percent year-over-year increase in digital interactions on Fidelity’s retail mobile and web platforms, these new roles will work in an agile environment to design, build and drive digital solutions for individual investors.”
Fidelity and Schwab’s growth in retail account openings, and Fidelity’s investment in tech personnel are sending a clear signal to the market that wealth management / wealthtech is an enormous growth story that will drive a lot of investment and M&A in the next few years. Arguably, this segment of fintech has already seen an increase in investment and M&A activity, and what Fidelity and Schwab are signaling represents the continuation and acceleration of an existing trend.
There has been a flurry of activity since mid-2020. Notable transactions include Empower Retirement’s acquisition of wealthtech and wealth management platform Personal Capital for $1 billion in enterprise value, and SS&C Technologies’ (Nasdaq: SSNC) $120 million acquisition of wealthtech Innovest Systems. These transactions represent more traditional wealthtech assets. The technologies primarily serve to create process efficiencies, greater automation, and inferential AI for existing wealth management firms, large investment advisors, and a slew of specialist firms encompassing everything from trust to pension management.
One must then look at what has become the leading-edge of the wealthtech M&A, funding, and investment movement which involves the online custodians and/or trading platforms themselves. By now, most of us are aware of the ascendancy of the no-fee, fractional share trading platform Robinhood and its forthcoming IPO, and crypto-asset custodian and trading platform Coinbase’s recent direct listing. But beginning in 2020 and continuing through 2021 there have been a slew of other high-profile transactions, including the Betsy Cohen sponsored SPAC ‘Fintech Acquisition Corp V’s merger with Robinhood competitor eToro, large VC inflows to social trading platforms M1 Finance and Public.com, and as recently as this past week, Mike Novogratz’s ‘Galaxy Digital’s announcement to acquire prime broker and crypto custodian BitGo for a reported transaction value of $1.2 billion.
The transactional activity speaks for itself. It represents nothing less than an explosion of M&A activity in fintech/wealthtech. But the continuation of activity in the sector is far from finished, and that’s where the Fidelity and Schwab numbers are really telling. Unlike many investment premises which are anticipatory, and necessarily proactive in having to predict where the next growth opportunity is going to be, the ongoing wealthtech M&A explosion is based on a reactive investment thesis – consumer demand.
The surge in new retail investment accounts reported by Charles Schwab and Fidelity combined with new retail investor enthusiasm for alternative investments like cryptocurrency, and a wave of technological innovation needed to automate processes and enhance product suites, are very powerful, but yet only proximate causes of the wealthtech funding and M&A explosion. The distal, or ultimate cause of this wealthtech explosion has been, and continues to be driven by retail investor demand, and there’s no more compelling thesis for M&A and strategic investment than that.
Across the spectrum of wealthtech assets, there exists a veritable widow’s cruse of investment and strategic acquisition opportunities, and there’s no evidence to suggest that either the number of opportunities or the level of transactional activity will do anything else but increase and accelerate respectively. The growth potential in wealthtech is substantial. For strategic acquirers and financial sponsors which are active in the fintech space, having the wealth-tech segment in their sights is not just wise, it’s necessary.
– Adam T. Hark, Managing Director, Wellesley Hills Financial, LLC