Can Tech Democratize Wealth Management?

Personalized financial advice is currently the province of the wealthy, partly due to a shortage of qualified financial advisors. However, emerging technology has the potential to multiply their productivity thus extending quality financial advice to the merely well-off, also known as the “mass affluent.” While this is good news for consumers, it also presents an opportunity for wealth-management organizations to grow their client base.

At the same time, western economies are approaching one of the most significant wealth transfers in history. As baby boomers start transferring their assets to their kids, the world of wealth management must adjust. Companies need to be prepared to serve this new demographic, and technology will be key to facilitating that change.

As a market overview prepared by QED Investors observes: "Future generations are digital natives, and consumer preferences are shifting toward a digital-first, self-service-style approach to wealth management that still involves a human in the loop. This differs from the traditional approach, where most advisors maintain high-touch relationships with their clients through in-person meetings and frequent phone calls."

Why the shortage of financial advisors?

There is not necessarily a shortage of people using the title financial advisor — it’s more that the title is applied too freely, often to people who might be better described as salesmen with conflicts of interest that inevitably lead to customers not getting optimal advice.

To get the best advice, you need to look past titles and for specific certifications. As OpenBanker writes, “The ‘gold standard’ for financial advice is from certified financial planners, who are individuals that are trained, tested and certified by the Certified Financial Planning Board. They often are paid on an hourly basis, and even if they do act as sales people they are required by their professional certification to act in the client’s best interest.”

So, why does this present a problem for investors who aren’t wealthy, but merely affluent? Essentially, regular folks have been priced out of the market. Again, Open Banker explains, “A typical investment advisor, who is also required to act in their clients best interest, might get paid 1% of assets per year. For a million dollar account that would be $10k of fees, but for a household with $50k of savings, that would be only $500 – effectively ‘buying’ just an hour or two of a professional’s time.”

Robo-advisors - pros and cons

An early attempt to apply technology to this dearth of qualified advice was the robo-advisor, which made its debut among services for retail investors ten or fifteen years ago.

Typically speaking, robo-advisors automate the process of investing, offering lower fees because they mostly rely on pre-set portfolios made up of low-fee exchange-traded funds. You can indicate what goals you’re trying to achieve and the robo-advisor will respond by picking different asset allocations through sub-portfolios. They can respond to market changes and even optimize your portfolio for tax efficiency, and some may even offer actual financial planning advice that can be purchased separately.

The fees charged by robo-advisors are low as Forbes notes: "Robo-advisors generally charge annual management fees of 0.25% to 0.50% of your assets under management (AUM), although some charge a fixed monthly subscription fee instead."

But if you want a comprehensive financial plan, you may need to find a human. Additionally, if you want to trade or invest in specific stocks, robo-advisors likely aren’t the best option for you. Anyone with a complicated financial picture will almost certainly need individual advice from a planner.

That this represents a new opportunity for advisory firms is confirmed by QED Investors: "A growing segment of consumers now find themselves in a middle ground: they've outgrown robo-advisors but are reluctant to engage with traditional, legacy financial advisors."

Enter the AI-assisted advisor

Robo-advisors use basic algorithms to drive the decisions they make on behalf of their customers. The advent of generative AI has has opened up the possibility of offering automated advice which is more sophisticated and more personalized, while still keeping costs low. Its most promising role is in automating time-consuming tasks for human financial advisors, allowing them to provide bespoke service for a larger number of clients.

According to an overview of AI applications by Investopedia, "AI can help financial advisors with a variety of day-to-day tasks, including client service, data analysis, portfolio optimization, risk assessment, and trend prediction."

By taking care of routine tasks, AI assistance can allow advisors to concentrate on the parts of their job that add most value: "With all of these benefits, advisors can focus on more strategic activities, like providing advice."

Digital efficiency, personalized service

QED Investors see this as an opportunity for wealth management firms to expand their operations to an enormous new potential client base - but the right technology will be key:

"The mass affluent is a distinct segment that falls outside the scope of traditional business models and solutions in the industry. This long-underserved segment is becoming a competitive arena for financial institutions ... Effectively capturing the mass affluent market requires scalable tech-driven strategies that seamlessly integrate digital efficiency with personalized service."

Wealth management first movers

Some players in the wealth-management sector are already refocusing their activities to include affluent clients. When Swiss bank UBS announced it would be expanding its reach in the USA market beyond the ultra-wealthy, it quickly became clear that technology was making this possible. As The Wall Street Journal reported, “UBS intends to further its reach beyond its traditional strength in the super-rich by investing in technology and adding to its pipeline of new financial advisers.”

Treading carefully

Naturally, the introduction of AI to such critical contexts is subject to the usual caveats about the adoption of AI technology generally.

First and foremost, AI is not yet up to the task of fully replacing a skilled financial advisor, and still has blind spots. For instance, AI can track liquid investments, but may not account for real estate portfolios. It can perform basic tax harvesting but once again cannot provide advice based on the broader picture. This is the same pattern we see across many aspects of financial planning, like estate and scenario planning, or even coaching.

Investopedia warns: "AI has potential legal, ethical, regulatory, and privacy implications. Financial services professionals would be wise to pay attention as the situation develops."

Human intervention is key, and entrusting your life savings to a machine may be a stretch for many investors. The technology may eventually get there, but trust will certainly lag behind.

Nevertheless, as we observed in an earlier post, tens of millions of dollars are expected to pass from Baby Boomers to GenZ and Millennials in the coming years. As these new groups look for financial planning help, AI will be instrumental in freeing up skilled professionals, allowing them to offer their services to a much wider client base.