There is a lot of discussion about how fintech is changing wealth management and how the adviser sector is evolving as I travel the country and spend time with advisors, partners, and industry colleagues. The discussion of evolution has made me reflect on Charles Darwin’s famous observation that species that are most adaptable to change—rather than the strongest or most intelligent—are those that survive.
Darwin’s lessons warn that, over the long term, individuals who are unable to adapt may wind up on the endangered species list. The strong and crafty may win the short-term conflicts. In this post, I examine how financial technology has affected wealth management and what financial advisers should do to make sure they survive in a market that is changing quickly.
The Rise of Fintech Wealth Management
Since commissions were no longer regulated in the 1970s, which resulted in the growth of the discount broker, the industry has been foreseeing the demise of the financial advisor model. No-load mutual funds were introduced in the 1980s and 1990s, and online trading was made possible by the Internet. The development of the robo-advisor, or computer-automated investment platform, in the 2000s has given skeptics additional reason to believe that advisors would eventually become extinct, much like the travel agent or cab driver.
I have a lot more optimism about the financial advisory industry’s future. Despite all of these advancements in financial services and technology that could potentially put human advisors to the test, demand for their assistance in guiding investors through complexity and achieving their objectives has only grown. The ability of advisors to adjust to these structural changes has been repeatedly demonstrated. In actuality, advisors have been able to adapt to these developments by developing new business models that profit from commission and technological disruption.
While some estimates indicate that over the next five years, the number of financial advisors is anticipated to either remain constant or rise only somewhat, growth in the assets managed by advisors indicates that the business is thriving. Assets under management have grown consistently, according to Charles Schwab’s Registered Investment Adviser (RIA) Benchmarking Report, with a five-year compound annual growth rate (CAGR) of 14.5% from 2015 to 2020.
Advisors’ Ability to Adapt and Thrive
Advisers should still be aware of the changes taking place around them and comprehend how they may require them to once again demonstrate their capacity for adaptation and success. The financial drumbeat simply get louder every year. This has occurred not only in the media but also with financial investments. According to KPMG Pulse, global investments in financial technology initiatives reached $210 billion in 2021.
Payments, cybersecurity, insurtech, wealthtech, regtech, as well as blockchain and cryptocurrencies, are some of the fintech industry’s subsectors.
This increase in investment in the fintech sector may be related to the emergence of robo-advisors. Industry study estimates that the entire market value of robo-advisors was close to $4.51 billion in 2019 and will increase to $41.07 billion by 2027.
The Impact of Artificial Intelligence (AI)
While the robo-advisor frenzy is well known, a remarkable increase in the number of artificial intelligence (AI) solutions impacting wealth management has been reported in the financial trade press. It may still be early, but the use of AI in financial advice is something to keep an eye on. The introduction of Salesforce’s Einstein predictive analytics tool has prompted the industry to think about how AI may assist advisors by helping them decide where to focus or by automating chores.
The collaboration between IBM Watson and H&R Block is the same.
The quick and continuous advancements in technology are thrilling from my perspective as an advisor and fintech leader. The more exciting advances for advisors focus on delivering scalability and removing the need for pre-conversational effort. Many developments directly assist the advisor-client relationship. High-net-worth investors are interested in digital financial advice of some kind and gain from new innovations, which is the target market for the majority of registered investment advisors (RIAs).
What Fintech Means for Advisors
How does this all affect advisors? First off, it’s obvious that investors anticipate using digital tools in their interactions with their financial advisors. Why shouldn’t people appreciate using digital tools and online communication in other aspects of their lives when managing their finances?
Investors are exposed to cutting-edge, clear-cut, and user-friendly tools that show performance thanks to Betterment and other companies’ mainstream media advertising. User design has long been a standard practice in companies that manufacture consumer packaged goods, but it has only lately started to be in demand in the financial services sector.
Second, advisors must make sure they are speaking to their clients in fresh and novel ways. Some clients don’t have the time to visit the office. Customers who are still in the workforce typically anticipate communications with their advisors to be swift and straightforward. They anticipate using client portals to access information at any time, examine it on their own, and communicate with their adviser using online collaboration capabilities. There is the highest level of openness available with this on-demand access.
The third concern is value, more specifically, whether or not clients recognize the value that their advisors provide. Many advisors provide considerably more assistance than just portfolio management and investment allocation, but it’s unclear if investors are aware of all the “extra” help they are receiving.
What Fintech Means for Clients
41% of all generations asked in a 2020 generational survey said they would think about utilizing a robo-advisor. Yet, only a third of Generation X and 15% of young boomers would be comfortable delegating financial choices to a robo-advisor, compared to close to half of generation Z and millennials.
Since most millennials do not experience the same level of financial complexity as their baby boomer parents, we could rule it out. But, it adds yet more justification for why advisors must keep expanding their network of reliable connections. We all agree that communication and trust are key reasons why clients choose or reject advisors.
Fintech may provide clients numerous benefits if implemented properly. In addition to the openness and digital experience, increased competition is bringing costs down, and digital technologies are freeing advisers of overhead and some manual tasks. As an illustration, Charles Schwab Corp.’s Schwab Intelligent Advisory robo+advisor solution costs 28 basis points, or a maximum of $3,600 per year. The plan offers automated rebalancing and tax-loss harvesting with a minimum investment of $5,000. The premium product is intended for mass affluent individuals with a minimum investment of $25,000, but it still makes a point about how important costs are to the market.
The Bottom Line
I’d advise advisers to seize any technological opportunities that can increase efficiency and help them connect with clients. After all, properly applied technology may assist you in overcoming the ostensibly difficult difficulties that all advisors today face, such as managing an effective and lucrative business, showcasing your value, and utilizing tools for growth. Darwin’s counsel is still valid.