Financial advisors play a crucial role in the well-being of their clients, from budgeting to wealth management. Nonetheless, the value of their counsel hinges solely upon the depth and accuracy of the information at their disposal. If advisors can't see their clients' complete financial picture, then it's likely they're providing incomplete or incorrect financial advice.
By way of illustration, let's say a client's financial goals prescribe a
Financial
Allowing clients to aggregate their outside financial accounts into a centralized platform enables advisors to gain critical insights to deliver more personalized advice and services as well as to run more efficient practices. As an example, an outside 401(k) could become a rollover IRA if a client switches jobs or retires. If an advisor is already considering that account for asset allocation, there's a chance to turn it into a managed account. In addition, many advisors use aggregation to monitor accounts for potentially
Open banking can also simplify verifications for tax filings, lending scenarios and compliance requirements. It also addresses most of the friction associated with the early methods of financial data aggregation like storing of credentials and frequent broken connections, leading to more adoption by advisors and their clients. Most importantly, open banking empowers the consumer to engage and share their financial data more securely with providers they believe can provide them with the best financial outcomes.
Evolution of open banking
From the consumer's point of view, what we know as open banking today began around 1995 with the advent of online banking, providing customers with a limited but secure access to their financial data on the website of the institution providing the account. Around 1999, innovative financial institutions and technology companies created solutions for financial data sharing. This mostly consisted of file downloads and direct feeds to allow consumers to load their data from their financial institutions into desktop applications such as Quickbooks or Microsoft Money.
From there, a commercial data sharing ecosystem developed with financial data aggregation companies developing technology to allow customers to permission and share their financial data digitally with a variety of third-party firms. However, neither the consumer nor the financial institutions had uniform security and privacy protections against malicious or inadvertent data leakage. Today, consumers provide consent directly to their institution, granting the third party and aggregator access to the data, providing the consumer with more transparency and control.
The consensus among regulators, banks and consumer advocates is that open banking enables more streamlined user experiences and more personalized financial advice. Sharing data with third parties — including financial advisors, apps and other financial institutions — enables consumers to exercise more choice in the selection of the products and advice services.
As a result, open banking is expanding due to consumer demand. The U.S. government is enacting legislation through the Consumer Financial Protection Bureau's implementation of
According to a U.S.-based market research company, Grand View Research, the size of the global open banking market is expected to grow to $135 billion by 2030. We've seen a steady increase in usage and adoption of data aggregation tools in the wealth management industry, with market penetration being reported at 48%, according to this year's T3 Tech Survey, and 62% according to a survey by Kitces Research.
The iPhone was launched in 2009, and more than a decade later it's clear we engage with the world via personalized experiences driven by apps and powered by our data. The iPhone initiated a surge of technology innovation, enabling consumers to access almost everything in one place. Open banking could have a similar effect, ushering in a wave of financial innovation and connectivity enabling advisors to drive better financial outcomes for their clients.
