While I am traveling the country and talking with industry colleagues and advisors, there are many discussions about how Fintech disrupts wealth management and how the advisory industry evolves. I was reminded of Charles Darwin’s famous words about the evolution of species. Darwin taught that the most adaptable and responsive species survive.
Darwin’s lessons show that the strong and clever may win short-term battles, but those who cannot adapt will end up on endangered species lists. This article examines the impact that financial technology has on wealth management and what financial advisors should do to continue to thrive in an industry that is rapidly changing.
Fintech Wealth Management: The Rise
Since the 1970s, when commissions weren’t regulated, industry experts have predicted the demise of the Financial Advisor model. This led to the rise in discount brokers. No-load mutual funds were introduced in the ’80s, while online trading was born out of the Internet. In the 2000s, we saw the rise of the robot-advisor or computer-automated investing platform. This gives cynics more reason to believe that travel agents or taxi drivers may soon replace advisors.
I am more optimistic about the future of financial advisors. Despite the fact that these innovations in financial services and technologies have the potential to test human advisors, their importance and role in guiding investors through complexity to achieve their goals has only grown. The ability of advisors to adapt to structural changes has been proven over and over again. Advisors have responded to these structural changes by creating new models that leverage technology and commission disruption.
The Registered Investment Advisor (RIA) Benchmarking Study from Charles Schwab shows that assets under management have increased steadily, with a five-year compound annual growth rate of 14.5% between 2015 and 2020. Charles Schwab’s Registered Investment Advisor Benchmarking Study shows that assets managed by advisors have steadily increased. The five-year annual compound growth rate CAGR from 2015 to 2020 is 14.5%.
Advisors’ ability to adapt and thrive
Advisors must still be aware of the changes around them and how they could force them to prove once again their ability to adapt. The fintech drummers continue to beat each year. The media has also reflected this trend, as have investment dollars. KPMG Pulse estimates that global investments in financial technology ventures will reach $210 billion in 2021.
The rise of robo advisors may be behind the surge in fintech investment. According to research conducted by the industry, the value of robo-advisors in 2019 was $4.51 billion and is expected to reach $41.07 billion in 2027.
Artificial Intelligence: The Impact on Society
The robo-advisor trend is well known, but the rapid proliferation of AI tools in the wealth management industry has been a major news story. It’s still in the early days, but AI in financial advice will be an important area to monitor. Einstein, the Salesforce predictive analytics tool, has given the industry a reason to think about the role AI can play in assisting advisors by automating or focusing on tasks.
As a fintech advisor leader, I find the constant and rapid innovations in technology exciting. The most exciting innovations for advisors are those that provide scale and remove the work done behind the scenes to prepare for conversations with their clients. Many advancements directly support the advisor-client relationship. Registered Investment Advisors are most interested in Digital Financial Advice and can benefit from the new developments.
What Fintech means for advisors
What does this mean for advisors and their clients? Investors expect digital tools to be part of the relationship they have with their financial advisors. Why shouldn’t investors enjoy digital tools and online collaboration in managing their wealth, too?
Investors are exposed to easy-to-use, modern tools that show performance when Betterment or other firms advertise in mainstream media. User design is a skill that has long been sought after in the consumer goods industry.
Second, advisors must ensure that they communicate with clients in a new and innovative way. Some clients do not have the time to visit their office. Clients still in the workplace expect their interactions with advisors to be direct and efficient. Clients wish to have access to information at any time via a client portal and to use online collaboration tools to check in with their advisors. This access on demand provides a high level of transparency.
Thirdly, the issue of value is important. Specifically, the clients’ understanding of the value their advisors provide. Investors may not realize that advisors offer much more support than investment allocation and Portfolio Construction.
Fintech and its impact on clients
According to a 2020 survey, 41% would be interested in using a robo-advisor. Millennials and Generation Z are more confident about allowing a robo advisor to make investment decisions for them. Millennials and only a third or so of Gen X are. 7 However, we could dismiss that because most millennials don’t have the same complexity of financial life as their baby’s parents. It is another reason for advisors to maintain their relationships. We know that communication and trust are important factors for investors in choosing or leaving an adviser.
Fintech can benefit clients in many different ways if it is delivered correctly. Digital tools and new competition are driving down costs while also improving advisors’ overhead and automating certain manual processes. Charles Schwab Corp.’s Schwab Intelligent Advisory robo+advisor is available at 28 Basis Points or a maximum of $3,600 per year. The product comes with automatic rebalancing and tax-loss recovery when you invest at least $5,000. The premium offering is aimed at mass-affluent investors who have a minimum investment of $25,000. However, it still sends out a message that costs are important. 8
The Bottom Line
I would advise advisors to embrace technology that can help them become more efficient and to get closer to their clients. When used correctly, technology can help advisors overcome the challenges they face today, including running a profitable and efficient business, demonstrating their value, and using tools to grow. Darwin’s advice is still valid.