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What Do Financial Advisors Need To Succeed Tomorrow?

If you are looking for yet another “Robo-advisor vs Human advisors” discussion, this post is not it. I believe automated advice offerings are nothing more than a natural evolution of an industry. As a strategy professional who has spent 1.5 decades in the US personal financial management (PFM) / wealth management industry, I am interested in its future. This is my attempt to objectively look at how this space may evolve for the financial advisors and what it takes for the advisors to stay relevant.

For those came in late, here’s a quick recap of the industry backdrop. Several external forces including digital ubiquity leading to changing consumer preferences, rise of machine learning and artificial intelligence (AI), rise of the millennial segment with their different set of financial needs, etc., are causing industry disruption. These forces are adding fuel to changes already brewing within the industry like the aging advisor population, move towards fee-based practice model, more regulations, etc.

The role of Financial Advisors will change…probably beyond what you think

In a recent panel discussion, people representing different industries talked about the next 3 years in their industries. The comparison between the healthcare industry and the financial services industry was all but inevitable. After all, both these industries are going through similar disruption, both are highly regulated, and both relate to a person’s well being– be it physical or financial.

But a financial advisor is no financial doctor, on many accounts.

Though the term “financial advisor” (FA) is used generally used across the industry, many of those “advisors” are actually product sales people. Michael Kitces has articulated this well in his blog. Unlike physicians, not all FAs are bound by a ‘Hippocratic oath-equivalent’ to act in their client’s best interest. While recent regulations – e.g., DOL ‘fiduciary’ rule in the US – are attempting to ensure FAs advise and act in their client’s best interest,  gaps exist.  For example, in the US, if a FA is advising you on something beyond retirement plans, he/she may not be bound by this fiduciary responsibility unless they are an RIA (Registered Investment Advisor).

 Even if all financial advisors were to act as fiduciaries in all instances, their current scope of their service is not holistic, from a need perspective

United Capital’s report and a subsequent Nerd’s eye blog post highlighted the mismatch between the ‘financial advice need experience by the individual’ and the ‘financial advice need as interpreted/served by the financial advisor’. The areas addressed by today’s FAs  are restricted to accumulation, protection and transfer of wealth; they fail to address “income source,” and touch lightly on the “spend and save” topics – both of which are predecessors and deciders of a person’s ability to accumulate in the first place.

Source: United Capital Report, Nerd’s Eye blog

In the coming years, I anticipate that FAs will be expected to

  • (As widely acknowledged in the industry) Move away from being product salespeople to true advisors acting in the best interest of the client
  • Advise on areas related to wealth protection, wealth transfer, and saving as a normal practice than as an exception
  • Advice on the topic of income generation (work), potentially in partnership with other professionals – like health professionals partner with wellness coaches for overall wellness. These partnerships may also be with apps powered by APIs, not people, for all we know..

 More machines cometh

Automation/ machines have been augmenting the industry for quite sometime now – be it in the development/ delivery of financial products (annuities, fund of funds, etc.)  or delivery of operational efficiency (portfolio rebalancing, financial planning tools, etc.). In recent years, automation has spread to more areas of this financial advice continuum to address spending/ saving needs (e.g., Mint, Digit, Dobot, etc.), or investment advice and asset allocation (e.g., Wealthfront, Betterment, etc.), or insurance advice (e.g., EchoSage), or asset aggregation to aid advice (e.g., Envestnet/ Yodlee), among others.

As I have mentioned last year, the role of machines/ automation is only expected to increase as data input explodes from all quarters and investors expect advisors to use permissioned data to provide contextual, personalized, timely advice when and where they require it.

In this context, a machine/AI is much better suited to look at terabytes and petabytes of data to provide insights deciphering patterns (E.g. IBM Watson). Further, when IoT is more widespread with ‘machine-to-machine’ communication, people will be “talking to” or “consulting with” AI personal assistants on a normal basis.

What’s an advisor to do? Do what a machine cannot do.

“Be more human” …and work better with machines

During a 2015 FinTech Conference, when asked how the role of a human advisor will change with the surge of artificial intelligence, Ayasdi’s Gurjeet Singh responded, “ (paraphrasing) they will need to be more human.” What he probably meant was that advisors will need to do more of what machines cannot do – build relationships, use data that is perceivable to humans like comfort level, situational context, etc., to provide the appropriate advice.

In a recent interview, FutureAdvisor’s Jon Xu, reiterated that advisors will need to take advantage of teachable movements – which is particular relevant when it comes to influencing investors to take action on the advice. An individual may require some tough love conversation from an advisor to realize that the café latte every morning is less valuable than becoming credit card debt free.

The importance of these uniquely “human skills” like influencing and teaching will be more pronounced in certain situations where counseling or behavior change is involved, and the individual needs more than data to be persuaded.

“Human” skills are just half the story. With digital ubiquity and increase of Artificial Intelligence (AI) in PFM, FAs will need to know how make the best use of these technologies and play under the new rules.

For example, advisors will need to “network” on virtual platforms and apps rather use meet-and-greet or bring-a-friend event. If this sounds stretched, consider this: I have been working with my current financial advisor for 4+ years and have referred clients to him…  and I have never met him in person!

More importantly, when AI applications can make insights available at your finger tips, advisors will need to know a) how to interact with these applications and request for the right insights and b) how to use these insights (because it could be information overload) in their advice.

Support needed to help with the transition: Focus on Education and Training

The apples to oranges comparison between doctors and financial advisors is most highlighted when it comes to education. While doctors spend 4-7 years in a professional medical school to be able to practice medicine, financial advisors in the US need appropriate federal or state level certifications to sell specific products or provide advice. And getting those certifications involves a few weeks/ months of studying. While most financial advisors have undergraduate degrees (and graduate degrees), they could be in science, business, art or psychology disciplines and not in financial planning. Less than 25% of FAs have a CFP certification which is a professional certification specific to Financial planning. With the disruption in the education industry, we should expect to see an increase in online education dedicated for financial planning degrees.

As more financial advisors choose independent channel, the responsibility of training novice advisors, previously done well by wirehouses and employee channel broker-dealers, has shifted to individual advisor practices.

In the coming years, I anticipate AI solutions to help by capturing and transferring tacit expert knowledge to help novice advisors.

For example, Merlynn’s TOM (Tacit Object Modeller) has several use-cases of cloning and scaling expert knowledge.

In the coming years, products and underlying fabric of distribution (platform) will evolve. Product companies will continue providing product related education. But what about education related to the larger changes in the industry? When an advisor uses an application – be it financial planning tool or an automated investment advisor – to augment their service, they’ll need to know the underlying algorithm at least at a high level. Many advisors today don’t know how a “robo advisor” operates. When AI is more widespread or fundamental infrastructure changes like blockchain takes effect, how will they stay updated?

A fewer options are emerging to help Financial Institution employees get educated/ familiar with these topics. The FinTech school in UK or FinTech school here in the US are examples.

In the coming months and years, these or similar independent ‘schools’ could cater to FA and bring them up to speed on industry changes relevant to their work.

So, as the industry changes, FAs will require several new skills to successfully serve as a “financial doctor” for an individual/ household.

I have not addressed two topic this blog: a) changing role of the Financial Institutions as the industry evolves and b) potential changes in regulation and oversight.

I plan to write a blog post dedicated to the first topic in the coming days, feel free to follow me on LinkedIn if that interests you. I don’t intend to write one on the second topic since that will be nothing more than mere speculation.

(Authored by the CEO and Founder of S2E Consulting)

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