(Image from Rhame & Gorrell Wealth Management)
Several years ago, I used to be an insurance agent cum mutual fund advisor. Economy and finance is one of my favourite area of knowledge besides IT, design and architecture, geopolitics, philosophy, history and sociology (Yes, I know. I should have proper hobbies like other human being). So I was eager to meet potential clients, did some sales presentation, listened to their concern and financial objectives and of course, closed the sales and collect commissions. And I used to take CFA (Chartered Financial Analyst) paper as well, only to drop it halfway because I was running my own startup (Yes, I’m a kind of person who always try his hand in business).
And it’s not actually easy to make a sell. Just to get an audience with the potential client is already a challenge of its own. Showing an insurance plan or some mutual fund that invests in some region or country that your client may not familiar with takes some convincing skills. Presenting some numbers and figures is just part of the puzzle, but you need to have some human
tricks skills on why should they forked out some money now for an event that may not happen at all (well, except death) or an investment that might go south (remember 2008’s Great Depression) and takes another few years to recover (if it ever recover at all).
Not to mention that that potential client might give lukewarm welcome or response to you because of their belief that insurance is sinful (for them it has elements similar to gambling).
(No, those are not the reasons why I took sabbatical from running the practice. I’m just giving an example of what it takes to become a financial advisor).
And usually there are two ways how financial advisors are making money. One, through charging a flat-fee (per-meeting or per-hour basis) to clients. Theoretically it is better for clients because financial advisors are not bound to sell specific financial plan to the clients, hence reducing the issue of conflict-of-interest. Two, commission-based through plan(s) sold, either one-time or spanned through several months or years.
The first instance might creates an issue where the financial advisors cramped as many clients and as many hours possible to maximise his or her earnings, while the second instance creates not only potential conflict-of-interest, but also the unscrupulous financial advisor may suggests a plan not only financially unfit but also persuade the client to take another plan after few years (for example, in several insurance plan, the financial advisor can only enjoy the commission for the first i.e 5 years. This creates loophole for those financial advisors to persuade their client to take another plan after fifth year and voila, fresh commission-fee again for the next 5 years).
But the emerging trends of fintech (and the so-called robo-advisors) has put financial advisors and us the average Joe and Jane on alert. Will those algorithm replace me as financial advisors? Or will it actually helps them, especially the honest and experienced one?
Tech As An Augmented Tools for Financial Advisors/Planners
Tech in financial advisory is not actually something new. Back in my day as financial advisor/planner, we already have tools where we can feed customer’s information and the system (proprietary nonetheless) will spit out how much should the customer should pay for i.e specific insurance plan and what’s the coverage like. As for mutual fund investment, plenty of (historical) data available for us to make recommendation on how much customer would be advised to invest in specific mutual fund that fits their investment objective.
However, with the rise of startups or even giants in financial institution that keen to enjoy the slice of the market, the fintech and wealthtech has given them an amount of opportunities either to tap into more potential customers or serving the existing ones with better services. And as customers (especially millennials) getting more and more comfortable doing their business or investment online rather than sitting down in a meeting with another human being (probably due to trust issues), this has creates a tremendous opportunities for fintech to gain more market share.
So which significant part of ‘tech’ that I think really helps those fintech companies in gaining market share (and potentially threatening the future livelihood of financial advisors)?
If there’s one thing about which part of fintech that I think really helps, it’s about crunching numbers and predicting pattern.
The behavioural data of potential or existing clients can be gauged by using i.e social media activities (i.e., showing off your street racing talent could be a problem here) or through our smart gadgets like smartphone or smartwatch with activity-tracking (i.e if it detects that you spent 1/3 of your day at gym, you could be considered as lower risk, therefore lower insurance premium). And if your shopping activities involved a lot of groceries, diapers or milk formula, the algorithm could consider that you are a parent (and a responsible one) and could flag you an appropriate education fund for your children or retirement planning for your own. The only issue? How comfortable are we with letting some outsider digging into our personal information, and how far should and would it go? For some, privacy is utmost important. But for others, the
cheapest most cost-efficient plan is what they’re looking for.
How many people can cope with never-ending daily news on economics, finance, geopolitical, sports and other current events on a daily basis? I did it few times (and still doing it) and I can proudly say that my brain is still operationally working. But it also mean that I have to forego other things that I need to do (like writing on this blog) and sleep around 1 a.m. Every. Single.Day.
But with the help of algorithm crunching those news (or at least some figures and numbers), client should be able to summarise daily news on their own (personal conclusion and opinion would be another topic) and decides which investment portfolio that they should choose. Of course, as much as holding stocks forever is the best option in the long run (according to the Great Oracle of Omaha, Warren Buffett), as a client they should from time to time analyse whether or not they need to rebalance their holdings. And as financial news no longer limited to those in Wall Street (or the one with Bloomberg terminal), clients can make the decision on their own whether or not the market is currently favourable or otherwise.
AI (and Chatbots)
Not all potential clients are comfortable in meeting a stranger, let alone someone who might try persuade them to part way with their money. Even with existing clients. not all of them are comfortable enough asking specific questions from their own financial advisor. So chatbots has become more prominent in entertaining and answering questions from clients regardless whether or not it’s in mid-afternoon or somewhere around 3 a.m. (try call your own financial advisor during that time. If he/she answered, I’d say you have one helluva advisor).
So AI and chatbots has become a new place or opportunity for clients to ask questions, checking existing financial performance or maybe even enrolled into one (good news for clients and financial companies, bad news for financial advisors). Your financial advisors gone to Disneyland because he or she reached sales quota and can’t be contacted for few days? Not an issue with chatbots, as it’s available for you 24/7.
Too Dependent On FinTech = Bad Idea
But how much is too much? Will we end up relying to much on algorithm to make our financial decision? Should we let everything on ‘auto-pilot’ mode?
My short answer ? No. My Long answer? Regardless how much advancement of wealthtech capabilities in the future, we should never let some algorithm decides on our behalf, especially one that involves our future. It’s one thing of letting an algorithm decides our route and price while riding an Uber. It’s another when the algorithm decides how much fund available for your retirement or your children’s college fee. The risk is much higher for latter than the former.
Relying too much on wealthtech could also brings an unintended consequences may falsely feeling comfortable and reluctant to actually monitoring their own insurance coverage or investment performance. As much as stocks is the best options in the long run, even Warren Buffett made a ‘mistake’ of not investing into technology stocks until quite recently.
Just a little side note and comparison, everytime the topic of automation enter the discussion, I can’t help but to remember what happened to the ill-fated Air France 447. And to quote David Learmount, an expert on aviation issues :-
This aircraft crashed because they (the pilots) didn’t know what’s going on. They should’ve known what’s going on. Do I blame them? No, I blame the system. The training. And it’s not Air France either because Air France trains its pilots like any other airlines train their pilots. It’s the fact that the training, the law requires the airlines to do is all wrong. It does not address the needs of pilots flying modern, highly automated aircraft and that is why Air France 447 happened
Imagine flying an aircraft with relying too much on automation and ‘forgot’ how to manually flew one. Then imagine running an investment portfolio without actually understands the underlying system, algorithm or even a basic financial literacy. I called that a recipe of financial disaster. Not to mention not all clients understand all the financial jargons and technical meaning of basic finance (time value of money, anyone?)
Will Financial Advisors Get A Pink Slip?
For financial advisors which their main knowledge and skill is only meeting clients and pushing the insurance or investment plan into their throats, I’d say their days are numbered. Maybe not in 2-5 years time, but it could be less than 10 years. If their skills are only asking questions and fill in the form (online or otherwise), that role is nothing more like a chatbot with a physical human body. And chatbot doesn’t need sleep, eat or even rest. How can financial advisors beat that?
In the future, financial advisors would and should work together with wealthtech to augment their skills. Financial advisors should and would be more well-versed if they want to survive in this industry. That includes not only their own products but also general environment in economy, finance and geopolitics (if you think your investment plan won’t be affected by China-US spat, think again).
Wealthtech is already here, and it’s going to be here for a long time. Financial advisors still be needed because AI and chatbots still can’t understand psychological behaviours of human around money and investments. Wealthtech will augment the honest, professional and knowledgeable financial advisors by automating certain processes and ease the discovery of information and knowledge. In the end, this collaboration between financial advisors and wealthtech would only make the client experience better for a long term and benefits all parties including financial advisors themselves.
Those unwilling to embrace? I suggest you start finding another career.