"Wealth creation is an evolutionarily recent positive-sum game.” 

- Naval Ravikant, Co-Founder and Former CEO of AngelList 

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Introduction

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An underlying theme behind recent innovations in fintech has been the idea of democratization of access, specifically with respect to dismantling the barrier between opportunities that were previously only available to the wealthy. While this can feel esoteric at first, it's a very powerful concept that is still in its relative infancy, with plenty of disruption waiting to happen. 

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When pondering the democratization of access, it’s important to place this in context with a real-world example. A classic and oft-cited case study is Robinhood, because it so clearly demonstrates a specific vertical within fintech in which the decades-long status quo was disrupted, allowing a previously underserved class to have access to a service or feature that was previously out of reach. 

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Historically, for decades, stock brokers charged commissions on a per-trade basis, which for most retail investors, due to the small monetary amounts they were transacting in, would amount to a significant portion of the overall investment. Almost by default, the commissions on trades alone excluded many retail investors from participating in the market. Furthermore, several other barriers to entry were in place, preventing the average retail investor from buying, selling, and trading stocks: purchasing stocks was a cumbersome process and oftentimes, brokerages required account minimums that effectively cut off most of the retail market. Robinhood, with the introduction of commission-free trading and zero investment minimums, upended the entire brokerage landscape in just a few years. Moreover, Robinhood entered the industry with a slick, award-winning user interface that was mobile-based, allowing anyone with a smartphone to set up an account and purchase stocks in a painless and hassle-free manner within minutes. Before long, not only had a new class of investors emerged (the retail investor class), but other brokerages followed suit: Charles Schwab, TD Ameritrade, and E-Trade, amongst many other brokerages, began implementing mobile apps and introduced commission-free trading, while also dropping account minimums. For all the good that Robinhood has done in democratizing access to the stock market, it is not immune to critique. Robinhood has come under fire for gamifying the investing experience, and allowing inexperienced traders to engage in high-risk strategies like options trading and allowing for investors to trade on leverage/margin. As we will see, democratizing access to opportunities previously only available to the wealthy has its risks - in some cases, barriers are in place not with the intention to be exclusionary, but rather to protect others from the substantial downside that certain investments can carry. While wealthier clientele can take on these risks and are often properly hedged, the negative consequences and an investment going bad can quite easily wipe out the average person.

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What can founders do to capitalize on the idea of democratization of access, and what are some fresh areas of disruption?  At BGV, we’ve identified a few niche verticals where we can envision disruption happening. In some of these verticals, there has already been movement with companies already in the space; other spaces, however, are largely ripe for a dramatic shift. We’ve identified the following five areas:

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1. Alternative Assets
2. Home Ownership
3. Wealth Management and Financial Advisory
4. Private Credit Markets/Direct Lending
5. Estate Planning

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Investment in Alternative Assets
According to Bank of America Private Bank, an astounding 80% of high-net worth investors between the ages of 21 and 42 are turning to investing in alternative assets, seeking above-average returns that cannot otherwise be achieved through the standard public equity/fixed income investments. This data is complimented and supported by a separate survey conducted by Ernst and Young, which similarly found that 81% of ultra-high-net worth individuals are invested in alternative assets to some degree, with alternative assets as an asset class increasingly accounting for a larger share of high-net worth portfolios.

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This begs the question: what exactly are alternative investments? While different sources produce different definitions due to the broadness of the asset class as a whole, alternative investments normally capture the following asset sub-classes: private equity, venture capital, hedge funds, commodities, collectibles, artwork, foreign currencies, derivatives, and some niche forms of real estate (farmland being one, for example). 

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There are companies in the space building platforms that allow the masses to participate in investing in these alternative assets. MasterWorks, for example, has allowed users to buy and trade fractional shares of fine art pieces, allowing the masses access to the $1.7 trillion art market. In another example, Fundrise has allowed investors to invest in multi-million dollar real estate investments and development projects. For venture capital and private equity specifically, companies like EquityZen and Forge allow for investors to purchase shares in private, non-publicly traded companies (although investor accreditation is required). Acretrader allows individuals to invest in farmland, allowing investors to purchase shares in entities that go on to purchase acres of farmland in and around the U.S. Clearly, there exists a degree of disruption happening in the space. As with any investment, however, returns on alternative asset investments vary widely, and like any investment, returns are generally contingent on market conditions. But nevertheless, increasingly, we are seeing companies identify niches and double-down on democratizing access to said niche. Regardless of the asset sub-class, we expect more of these companies to appear in the coming years, especially in light of current macroeconomic conditions, where investors are seeking alpha to beat the market return.  

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Home Ownership

Home ownership remains the largest source of wealth for many Americans, with the median value of a primary residence worth almost ten times the median value of financial assets held by families. The benefits of home ownership are immense: homeowners can benefit from appreciation in market upticks, build equity which otherwise cannot be attained if one is merely renting a home, can convert their primary residence into an income-producing rental property, and be eligible for mortgage interest deductions come tax time. However, for many Americans, the dream of home ownership is still far out of reach, particularly with home prices surging across the country coupled with a sharp rise in mortgage rates. 

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The housing crisis is a problem that has been decades in the making. After the 2008 housing crisis, home lending became more restrictive. While well-meaning and intended to protect consumers from predatory and dangerous lending practices, many aspiring homebuyers have difficulty getting underwritten for a home. This is coupled with a housing shortage, which for states like California, has come as a byproduct of high population growth and restrictive building policies (according to a study by McKinsey). 

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Prospects for home ownership for many are slim, but thankfully, some innovation is happening in the space to democratize this. Roots Homes, for example, is utilizing a model where Roots purchases a prospective homebuyer’s desired home and rents it back to said buyer; the caveat, however, is that part of the rental payment that the prospective homebuyer pays each month to Roots is allocated towards an equity stake in the home, allowing the potential homebuyer the benefit from upside appreciation. Divvy Homes, another company attempting to democratize access to home ownership, utilizes a model extremely similar to that of Roots, where each rental payment contains an allocation allotted towards a down payment, opening the pathway to possibly purchasing the home down the line. On the flipside, with respect to investing in property as opposed to living in a primary residence, companies like Roofstock have developed an online rental home marketplace, allowing individual investors to analyze and offer on potential investment properties across the nation.

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Wealth Management and Financial Advisors

The wealthiest individuals and family offices in the United States often have a litany of individuals and firms offering tailored, bespoke advice and information to guide the most critical of financial decisions. A critical member of that team is, unsurprisingly, the wealth manager. Historically, private wealth managers have been notoriously difficult to access due to the financial barrier to entry. In most cases, these wealth managers require millions of dollars in liquid assets to even establish an account. 

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However, technology is quickly changing this, namely with the help of AI. An astounding 98% of financial advisors state that their brokerages have already taken steps to implement AI-based strategies in some capacity. While we’ve seen robo-advisors take form over the last several years with respect to micro-investing, the deeper integration of AI within these existing brokerages coupled with the deployment of smart, ML-based algorithms into wealth management specifically can increasingly push the marginal cost of providing wealth management services to zero, increasing the ability to bring wealth management services to all. 

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Utilizing AI in the wealth management space comes with the goal of reducing costs, minimizing the need for financial advisors to perform mundane tasks, and scaling the ability to provide tailored investment services to a wide swath of clients, not just high net-worth ones. Increasingly, firms such as Morgan Stanely and Vanguard are jumping on board as they are also realizing the value in adopting technology to democratize advisory services. In a study conducted by Accenture, 99% of financial advisors feel that AI plays a role in the future of financial advice. 83% believe AI will have a direct, measurable impact on the client-advisor relationship within the next 18 months. Perhaps most importantly, financial advisors are ready to adopt AI. 87% said they want to use more AI in day-to-day operations.

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Private Credit Markets

A not-so-well-known alternative asset gaining steam is private credit. Private credit refers to loans structured and negotiated in private, outside of the purview of traditional, public debt markets. Effectively resulting in direct lending, the applications for private credit are vast: it can be used to finance mergers/acquisitions, provide working capital to SMBs, finance a real estate transaction, and much more. From a borrower’s perspective, private credit can be funded at an execution speed that banks cannot match, with an added level of personalization. With direct lending, a borrower can know and be familiar with their lender, allowing for flexibility otherwise unattainable. For investors, private credit provides superior returns as it can command an interest rate that sits above market rates. In light of current macroeconomic conditions particularly, private credit is increasingly becoming attractive on both ends: with banks becoming more risk-averse and reducing loan activity, private credit lenders can close the gap. 

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According to Goldman Sachs’ Asset Management arm, private credit has outperformed public loans over the last decade, delivering 10% annualized returns versus just 5% for public loans; Goldman Sachs also shows that private credit has not only outperformed public debt in the last 10 years, but also the last 15 and even 20 years. At Blackstone, private credit has outperformed public credit by 14%.

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High net worth individuals and family offices are increasingly upping their exposure to private credit markets. Private credit, however, is still generally closed off to most individual investors. This space is open for disruption; while some large private equity firms have certainly allowed investors to invest in private-credit funds (such as Blackstone’s BCRED) most private credit funds often required accreditation, which have effectively excluded most investors. it’s a space that still remains largely unknown to most, and relatively untouched by the technology industry from a disruption/innovation standpoint.

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Estate Planning

One of the more complex components of the opportunities afforded to high net-worth individuals is that of estate planning. Due to the sheer value of assets at hand, estate planning is often not optional for the wealthy - it’s necessitated. Navigating through a complex web of tax law, estate planning has often been associated almost exclusively with wealthy individuals. 

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An argument is often made that the average individual may not benefit from estate planning. While that’s true to a degree, especially in relation to asset value, one could argue that anyone with any assets (whether it’s a 401K, life insurance, equities, a home, or even personal belongings), can benefit from the bare minimum estate planning essentials. Data suggests that nearly 70% of Americans do not have a will; in the event of a death, dying in the absence of a will is problematic for non-traditional families or unmarried couples. Moreover, 66% of Americans currently without a will have not yet even started thinking about it. It’s important to note that, for the average individual, not having these matters in order can actually come at substantial financial cost.

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Estate planning has generally been a high-touch and very intimate business - oftentimes, an estate planner works directly with the client in conjunction with an experienced attorney to construct the ideal plan. However, with technology, this is changing. Many firms that are offering DIY models to create estate planning documentation (such as a will) on the internet. For most, a simple estate planning solution could easily suffice, as the complexity of scales with asset value. 

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Closing Thoughts and A Big Tailwind

Perhaps the largest tailwind that founders and company-builders in the fintech space can benefit from is what may be the largest, generational wealth transfer in modern history. Studies estimate that approximately $68 trillion will move between generations in the next 25 years, with assets transferring from baby boomers to their millennial and gen-z children. The massive scale of this wealth inheritance will require advisors, planning, and additional resources, and will open up an entire, technologically-savvy generation to an industry that is largely still antiquated and not properly positioned to a new clientele profile. Company-builders have an opportunity to capitalize and serve new product offerings to what was previously an under-served generation: millennials and gen-z are statistically less wealthy than their predecessors/parents, and have distinct needs and desires. 

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