Article originally contributed to Datafloq
With the rapid growth of AI, machine learning, and natural language processing, a new breed of robo-advisors is surfacing. The latest advancements are proving to be disruptive from basic portfolio management to private banking.
Better still is that paired with the modern robo-advisor, investment services that were only available to the ultra-wealthy are now available to the mass affluent. However, algorithms are not achieving this alone; there is still a critical role for the human financial advisor, but it’s changing.
The primary role is investment alignment which refers to the integration of investing services such as tax and estate planning, retirement planning and financial planning. For investment alignment to occur, financial advisors, accountants, operators, attorneys and other professionals must be ready to work in unison.
Family offices have in the past been the only ones offering integrated investing services, but with the growth of cognitive computing, the need for combined investing services is rising. Investment alignment not only minimizes costs but also maximizes opportunities that would have otherwise been missed or underutilized in misaligned investing.
According to Brent Ross, the founder of Ross Hughes and Associates CPAs, there are a number of reasons why individual financial advisors shy away from working with other parties in wealth management. The first is that they are all competing to control the investor’s assets. One party may fear losing business if they let another in.
In Brent’s example, a financial advisor may fear losing business to an insurance agent who will reapportion their investment to an insurance contract. The diversion of this portion of the investor’s wealth means that the financial advisor will have less money to control hence reduced compensation.
This arguably holds greater truth in Private Equity and Direct Real Estate where the client gets the short end of the stick. The same reapportionment dynamics apply per the mentioned example, but here’s the larger problem: these interest-conflicted parties aren’t operating in a model that allows them to collaborate and help the client.
So what is the result of not collaborating because they are operating in the wrong model? The clients receive watered down private equity products or simply get no recommendation at all. Technology is solving this problem for Mainstreet.
Financial advisors also feel that collaborating with other parties will take more of their time without compensation. However, these reasons are losing ground with the rise of algorithmic investing. With robo-advisors controlling the financial advisory function of investing, financial advisors have no option but to focus on building value through other avenues.
Unlike baby boomers, millennials have high trust in technology over human advisors and are therefore moving to wealth management firms with a tech-based advisor function in place. The number of millionaires is also on the rise globally, and private banks can no longer afford to handle them all.
These millionaires, many of them millennials, are well informed on the power of algorithms in investing and the advantages of integrated investment services. According to a 2017 report by Credit-Suisse Research Institute, the number of millionaires has grown 155% in the last year while ultra-high net worth individuals (those with $50 million and above in assets) has increased by 216%.
The rapid increase seems to be overwhelming the private banking industry with many players raising the bar for white glove financial services — only accommodating double-digit millionaires. At the beginning of 2017, JP Morgan raised the minimum asset level required to qualify for private banking from $5 million to $10 million, locking out about 10% of its millionaire customers.
Other bulge-bracket banks have followed suit with Goldman Sachs and Bank of America’s Merrill Lynch raising the bar to the same level. Consequently, a huge number of single-digit millionaires are being denied proper investing services. This is an opportunity for forward-thinking investment advisors and boutique wealth management firms.
According to a survey by MyPrivateBanking, the majority of affluent and high-net-worth individuals recognize the potential of algorithmic investing services in adding value to wealth management services. The study shows that the affluent and ultra-wealthy use online investment tools more than any other type of investor.
Individual investment advisors and wealth management firms targeting the mass affluent must be ready to adopt the robo-technology as the first step towards appealing to this class of investor. With the best robo-technology in place, investment alignment will be possible. Financial advisors focus will move from advisory services to other functions such as investment alignment and customer service.
Given that machines can now offer better financial advisory than humans, the competitive advantage in wealth management is now shifting to investment alignment, emotional intelligence and customer services.
Financial advisors who don’t develop emotional intelligence are bound to fail since the new roles of wealth advisors demand more people skills than technical skills.