The financial advisory industry is ripe for disruption. While it frequently generates attractive profits, the industry is also notoriously slow to evolve. Advisors who can adapt and incorporate new technologies will position themselves for success. Those who don’t will be left behind.

The biggest evolution so far has been a transition from transaction-based compensation to fee-based accounts. Following the 2008 financial crisis and the rise of passive investing, investors have begun to pay closer attention to the fees they’re charged. Accordingly, fee-based accounts, where costs are more transparent, have grown in popularity.

A New Approach to Investing

Investors have also shifted away from higher-cost investments towards more affordable ones, like ETFs and index funds. This partially explains the dramatic move away from active management toward passive management strategies.

Passive investments’ lower fees, combined with the market’s strong post-crisis performance since the crisis means that advisors who still value active will need to demonstrate its value to their clients.

The most effective way to do so is by delivering outperformance versus a benchmark, which is only possible with active management strategies. Passive strategies can only guarantee the market performance, less fees, which mean that they underperform the benchmark by default. Given that we’re likely closer to the end of the current bull market than the beginning, advisors may consider reexamining the role that passive strategies play in their clients’ portfolios.

Widening Margins and Simplifying Tasks

Regardless of the market outlook, fees will likely continue to drop. That doesn’t mean that margins will compress as well. As revenues drop, cutting costs will help preserve profitability. Firms have already cut costs by adopting new technologies that automate the administrative and investment functions currently performed by advisors. Autonomous Research recently published a report estimating that AI can reduce front, middle and back office costs by nearly $200 billion by 2030.

Technological developments have also led to higher client expectations. Consumers are used to always-on access to information and services. While high-touch service is still important, clients expect to review their investments at any time, have access to investment opportunities across asset classes, themes, and geographies and require robust cybersecurity and data protection. The last point is especially important: according to a survey by the Financial Planning Association, 80% of advisors rank cybersecurity as a “high priority,” but less than 30% feel equipped to “manage and mitigate the associated risks.”

Most advisors simply have too many tasks and not enough time. Automating some of their workload will free advisors up to spend more time interacting with their clients.

The tasks that are likely to be automated are those that do not require critical or creative thought. Simple communications and routine client servicing are already being addressed through a combination of artificial intelligence and clever client segmentation.

Areas such as asset allocation, portfolio construction, and rebalancing are candidates as well. Blackrock has introduced ETFs that select holdings based on machine learning and natural language selection. Their ETF structure and AI-based decision making make these significantly cheaper than typical managed funds.

Managed accounts and model portfolios provide advisors another avenue to maximize their available time. Morgan Stanley has rolled out a product called Next Best Action, which monitors client portfolios and suggests actions based on client investment profiles and policies. The system is expected to eventually make recommendations that go beyond just investment-related topics, further cementing the advisor/client relationship. Systems such as Morgan Stanley’s will differentiate newer, higher touch, integrated service offerings from traditional, antiquated systems that are built on human intuition. 

Beyond Client Servicing and Portfolio Management

Artificial intelligence is also a tool that can help advisors generate leads. Software can analyze demographic and public data to create marketing campaigns. It can also analyze response rates and optimize campaign effectiveness.

One area which does not lend itself readily to automation is the ability to provide clients with tax, estate, philanthropic and other specialized advice. Higher-net-worth clients typically have more extensive and complicated asset portfolios and require assistance beyond investment advice. Many of these customized services do not lend themselves to easy scalability. In this instance, one solution would be to form teams. A team allows for specialization of skills among team members and greater efficiency in providing client solutions from administrative to advisory functions. In this way, teams provide natural scalability and leverage to meet client needs.

Essentially, all manner of tasks will be open to automation but managing client relationships will likely always require a human touch. Cultivating and maintaining strong client relationships depends on two fundamental elements: establishing a high degree of trust and being available and accessible to clients. A frequent cause cited by clients for switching advisors has been the perception of a lack of time and responsiveness. In a world where clients are demanding increased accessibility to their advisors, every minute will count. It is here where the expansion in communication channels can help advisors maintain their relationships.

Technological applications will be most effective by helping advisors maximize their available time and allowing them to devote their time to communicating with clients. Given that the majority of new clients are the result of referrals, this will be more important than ever.

The exciting takeaway here is that technology will provide solutions to advisor’s cost centers as well as help them leverage revenue opportunities. The caveat is the those who fail to adapt and evolve will face serious challenges.