Designing the wealth management industry in Africa for the digital age

Dec 30, 2014 by S.N. Obedih Mastering the art of managing Risk (Entrepreneurship & Angel Investing)

The financial services industry is facing a wave of digital disruption that is starting to reshape the industry. Global Fintech financing has grown from less than $930 million for the whole of 2008 to over $1.04 billion in the month of October 2014 alone. Read on to see the shining stars disrupting in this bold new space.

Recent research conducted by Tajili Wealth Management, found that the African savings market is increasing very rapidly and by leveraging the technology used by the so called Robo advisors, the African wealth management industry could leapfrog legacy issues faced by the same industry in developed markets thus having a higher adoption rate than we have witnessed in other markets such as US or Europe.

Robo advisors are “technology platforms that offer investment advice and selection based on an individual’s financial goals and manage those investments based on an algorithm for a low cost,
There are 16,680 HNWIs in Nigeria collectively worth US$138 billion, a number that is set to rise 22% to reach US$180 billion by 2018. In 2014, Ventures Africa counted 55 African billionaires with a net worth totalling $161.7 billion, a 12.4 percent rise from $143.8 billion in 2013. These numbers show potential for a robust wealth management industry, however due to reasons that i can’t explain here, more capital leaves Africa every year. Africans tend to invest in land and real estates however due to insecurity problems, more people are now looking to buy abroad. London and Dubai are the leading destinations.

These super-rich look to buy property in the ‘platinum triangle’ of Mayfair, Belgravia and Knightsbridge. Around 80% spend between £15 million to £25 million on a residential property, with 10% spend more than £30 million. Fund managers have led us to believe that they can grow our wealth, we entrust them with our pensions funds and the future of our children only to be disappointed in the end. It is very hard to find fund managers who beat the markets. There is a new generation that has lost faith in the old banking industry and are looking for new alternatives.
In essence fund management is about making money often for the owners of the business and not the clients. To run a fund management business 1/3 of the cost goes to research and trading, 1/3 on salaries and 1/3 is spent on marketing. The industry is notorious with high fees and low returns. It goes without saying that the industry is ripe for disruption as most of these functions can now be automated using software. The average charge in the industry is 1.5–2% of the assets under management. The leading robo advisors can reduce that to 0.35–0.5%.

Research from Corporate Insight found that eleven of the leading online automated financial management platforms — so-called “robo advisors” — now manage a total of $19 billion in assets. That’s still a relatively small slice of the entire wealth management industry, but it represents a 65 percent growth for robo-advisors in just the past eight months.

Passive investing has been widely successful in the US and has won over new customers in other markets across Europe and Asia, as the notion of pension funds dwindles away, people are forced to look at various alternatives. Diversification is the key but most importantly keep the costs low.

The Africa Rising narrative is redefining the continent as one of the most attractive investment destinations. This Bullish pitch for Africa is increasingly reflected in equity valuations for listed companies that reflect the continent’s growth potential. Navigating the pockets of turbulence, in old and new hotspots, presents a compelling investment opportunity for equity investors with patient capital and longer time horizons. The potential for alternative investments is simply immense and i can safely say that Robo advisory platforms will play a very big role in this ecosystem.