Democratizing Financial Service

· 574 words · 3 minute read

Everyone deserves sophisticated investment advice.

It is the mission statement of Wealthfront. Traditionally, most wealth management was covered by private banking (PB), which always had a high bar. For example, Morgan Stanley’s private wealth management department has the following introduction:

Since Morgan Stanley’s founding over 75 years ago, one of our most distinctive values has been ‘doing first class business in a first class way.’ Morgan Stanley Private Wealth Management was created over 30 years ago to further demonstrate this value—and to deliver our firm—to an exclusive group of clients: successful executives and entrepreneurs, their families and foundations.

Clearly, not everyone would qualify to be an exclusive group of clients. Indeed, the PB service is for HNWI (High-Net-Worth Individual), and the term typically requires at least $1M. Even if you qualify, there is a large spectrum of services that you may not get. As an extreme example, British Royal Family has the entire Coutts & Co. for their PB1.

Thus, the mission of Wealthfront to democratize this exclusive banking service to a large audience makes sense. Here, technology is essential due to the inherent cost of consulting about complicated financial services. More specifically, if you had $1, even after a fantastic financial service of doubling your asset, the net delta of $1 is too small to justify any human involvement. Only the technology can significantly lower the cost, at least in theory.


I’m also paying attention to Robinhood for a similar reason: they envision making stock trade commission to $0 (large brokers like E*Trade and Scottrade charge ~$10 for each transaction.) Here, $10 has a more significant implication than it seems: $10 per transaction means you start with a 2% loss if you only have $500. Thus, while high-net-worth individuals can easily ignore the small commission, this can be a deal-breaker for small investors. Only the zero commission will make investments equally accessible to a larger audience2. Like Wealthfront, this innovation is directly democratizing financial services.

When you have smaller assets, you face many hidden obstacles. The above cases of minimum assets for the PB service or the fixed commissions are good examples. I’m not saying those obstacles are unjust. Services cost money, and in capitalism, you get better services as you pay more. I’m just saying there are subtle obstacles that make services not as accessible as they seem. For this reason, I’m keeping an eye on the missions of Wealthfront and Robinhood and cheering for them. I believe they are on the right path to enhancing equity. I also hope they make a significant profit on this journey. ∎

  1. Coutts & Co. was founded in 1692 and is one of the oldest banks in the world. For now, they are expanding their business beyond the British Royal Family to help other entrepreneurs or landlords. However, since they require £1 million to get service, the bar is still high. ↩︎

  2. My Korean brokerage firm charges 0.25% for both buying and selling (a larger amount of 0.25% or $5.5, to be precise). As far as I know, all the Korean services charge the ratio. Even though this sounds fairer, I doubt if this makes sense in practice. For example, if you buy and sell stocks worth $1M, you start with paying $5000, and I doubt such individuals will use the same services (since the US companies offer much better options). Anyway, my transactions typically cost about $5.5, so I don’t think I have other options. ↩︎