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US Wealth Management industry’s blurred vision of digitalization

Having spent most of my career in the US Wealth Management/ Personal Finance Management (PFM) sector, I know that there is a significant gap between demand for and supply of professional advice needed for households to manage their financial life. So, I’d like see this sector evolve fast and for the better. In May and June this year I attended two industry conferences – FinovateSpring 2016 and IN|VEST NYC respectively to assess the pace of progress. While Fintech startups are providing options to move forward, incumbent players in the industry are not changing fast enough. The latter’s pace is important since US wealth management industry is still a B2B playground. The industry is significantly behind in delivering what an individual from financial needs and goals expects from it – now and in the future. One of the main reasons: the incumbent players – barring a few industry leaders – do not seem ready for the ramifications of digital disruption on this sector.

Let me shift my paradigm slightly to frame the conversation.  On a recent trip to NYC, I had to travel between two unfamiliar destinations using public transport. As a second nature, I consulted my mobile app and got a few options.  Come to think of it, the app provided personalized and contextual help; it provided options based on my transportation preference and the time of trip. Further it helped me where I needed it and when I needed it. If I were driving, I would have also received proactive notification on delays and route change suggestions.  As a consumer, I have come to expect such personalized and proactive help where and when I need it.

Now, compare that with the state of current personal financial advice.

If you are seeking personal financial advice, you can

  1. make investment decisions on your own self (self directed),
  2. get guidance from a professional (a financial ‘advisor’ or an investment advisor) or
  3. seek algorithm based automated advice delivered digitally (robo-advisors).

But currently all these options do not provide holistic, personalized and contextual help when and where I need (see below).

I know that financial advice is not as simple as providing travel directions. But I am calling out that as a consumer in today’s digital world, I expect a service provider to use permissioned digital data available on me to provide personalized, contextual, proactive advice when and where I need it. And incumbent US wealth management/ PFM industry is not close to delivering it, if a recent industry conference was any indication.

‘Digitalization’ seen through the eyes of the incumbent industry

Many times the pulse of an industry can be felt at well attended industry conferences. No one conference truly represents the state of an industry. But since IN|VEST conference (NYC) was organized by a well followed industry publication house, I believe it presented a good reflection of the industry’s perspective on digital disruption’s implications.

Disclosure: Since the conference had parallel tracks, I could not attend every single session. These observations are based on the sessions I attended.

First, the good news. Instead of denying the potential of automated investment advice providers, i.e., “robo-advisors,” the value and competition from robo-advisors are being acknowledged by the industry. There was undeniable acknowledgement that automated investment advice is here to stay in its current or a different format. In fact, the need for collaboration between robo-advisor startups and incumbents was a major recurring theme at the IN|VEST conference.

Here comes the bad news. That was the extent of “digitalization” discussions – for most part. There were some tracks that went into the implications of digitalization but they did not have the depth to make a dent.

The absence or insufficient focus on these topics spoke to the low preparedness of the industry on implications of digitalization:

  • Digital money and digital assets: While still not widespread, digital currency is being used and value is being exchanged on mobiles without physical currency. What does it mean for a financial advisor when digital currencies and other digital assets (e.g., data) figure in the portfolio for investment and legacy planning? Not enough was spoken about this
  • Blockchain: Widespread adoption of Blockchain could have multiple implications for this sector from payments to trade settlement to asset ownership recording. With the likes of R3 (R3CEV) experimenting with Blockchain, its adoption is expected to increase in the coming months and years. This topic did not get much airtime
  • Potential impact of GAFAA entry: While the regulation barrier is high for non-FinServ companies, technology giants like Google, Apple, Facebook, Amazon and Alibaba (GAFAA) are indirectly involved in the industry through their Corporate VC arms. And the reach of these companies through their existing client base will have immense implications for traditional advisors. But GAFAA was not discussed enough.
  • Savings and Social Inclusion: One of the biggest positive impacts of digitization in other FinServ sectors, e.g., payments and lending, has been financial inclusion. While there was discussion on savings and making retirement planning advice more accessible, the industry does not seem to be focusing enough on making financial advice accessible to those underserved (and who need it the most).
  • Digital Identity and Data Security: This requires a blog post of its own but the it suffices to say that in the near future, a person will be identified by the data that is created by and stored on them. In fact, discussions have already started around IP-type rights for personal digital data. This future scenario was not explored enough.

If incumbents are not even acknowledging the reality of digital identity, how will they be ahead of the game securing a customer’s digital identity in the very near future? In this case, ignorance is detrimental for their own survival.

  • Creating value of “human advice” in the world of IoT and Machine-to-Machine interaction: This should have been the crux of the conference. While discussions on ‘justifying fees’, ‘human being vital to financial advice’ and ‘providing what machines cannot (maths 10% emotions 90%)’ were being heard within and outside sessions, they did not get tactical enough on “how” to create value.

The “how” is derived by understanding “what” machines are offering and how to utilize them to the deliver superior advice that motivate people to act.

Several FinTech vendors like ForwardLane, IBM, Polly Portfolio were sharing how machines could help human advisors. But going by the conference participants’ response, the industry was not really spending enough energy in understanding how Predictive analytics, Machine Learning and Artificial Intelligence works and and how they can augment human advice offering, especially in a new world where machines (IoT) make transactions on behalf of a person.

‘Digitalization’ seen through the eyes of Fintech community

FinovateSpring in May showcased about 13 Fintech startups’ vision of wealth management/ PFM industry. As mentioned in my earlier blog, they cried out personalization, digital security, using Machine Learning/ Artificial Intelligence, financial inclusion esp savings, –  and B2B focus.

Specifically, Envestnet|Yodlee’s Advisor Now, ForwardLane, IBM Watson’s use case for Wealth Management and Polly Portfolio showed how data aggregation combined with cognitive computing could deliver personalized advice … if one could connect the dots.

And companies like brandCrowder, EquityZen, WealthForge and meetinvest showed the promise of bringing investment options beyond ETFs into the automated advice mix.

So, there are plenty of options for the industry to move ahead, if only the incumbents can foresee the implications of digitization and forge the right partnerships for augmenting their capabilities.

What can industry incumbents do?

While bootcamps, incubators, hiring consultants, etc., are being touted as the solution to understand digital disruption implication and transforming, here are three solutions that have worked for me:

  • Educating and raising awareness on the impact of digitization at the grass-root level: All employees, irrespective of the level, should be encouraged to learn about existing/ emerging FinTech solutions and implications of digital disruption. Sending employees to FinTech conferences like Finvoate is an effective way to create awareness of potential opportunities and gaps.

Awareness of the gap is a better motivator for innovation than just top level directive

  • Looking beyond Financial Services for clues and possibilities: Attending a conference or two related to parallel or related industries will help envision possibilities by drawing comparisons.
  • Taking an “outside in” perspective: It’s only when the industry looks at what the consumers want and need, rather than thinking about making the current business model work, will they be truly transform to stay relevant.

In last year’s post, I had called out that ‘robo-advisors’ is just the tip of the ice berg of digital disruption. Some of the speakers, especially industrial leaders called this out at the IN|VEST conference.  This year, the financial services industry is seeing more ramifications of digital ubiquity from mobile-only banks to discussions on digital identity protection. As the world gets ready for the next wave of internet evolution, i.e., machine to machine communication fueled by IoT devices, several big banks are trying to reinvent themselves by exploring alternate business models like BaaP and BaaS. Traditional PFM providers on the other hand, are looking at incremental changes seemingly aimed at preserving current business model than truly trying to meet the consumer where they want to be met.  Hoping that the PFM industry starts thinking outside their bubble for the consumer’s sake – and for their own sake.

The author is the CEO and Founder of S2E  Consulting, LLC

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