How firms are holding back innovation: Q&A with In|Vest speaker Jim Del Favero of Personal Capital
Q. What have you seen driving the most change in wealth management?
DEL FAVERO: There has been a lot more commoditization and productization of certain parts of the wealth management landscape. We’re seeing companies out there building white-labeled robo advisor solutions that work within the client planning experience. More planning tools are coming out than ever before, and most of them are focused on the advisor. There are complete suites of technology coming out to do everything from planning to product suggestions to managing 401(k)s. RIAs are struggling to cobble together technology to figure out which experiences to pair best with which clients. It’s a difficult path to navigate.
What will transform wealth technology in the coming years?
The most basic function that I appreciate about my bank is if my balance drops below a certain amount, the bank will move money from my savings account to my checking account for free. Finances can be completely automated to make my life easier and worry free. We know AI can already do that. The piece that is the hardest is integrating all the individual systems to make it work — that’s the part that’s going to take a lot longer.
What’s the biggest barrier to innovation?
Financial institutions can theoretically see all of my transactions. For example, when I get paid and how much I get paid. How much my bills are and roughly what my future bills will look like. So we could put the majority of money on autopilot. The problem is even the best financial institutions that deal with real time processing of transactions move too slowly. If you lined them all up and tied all those institutions together, what would be the round-trip time it would take to move money from one place to another? The problem is connecting those 15,000 institutions with different technology stacks that update them at different times. It’s the longest pole in the tent.
Some clients still need to send a canceled check to a broker to transfer money. That stuff is still out there and that’s what fintech companies are fighting against all the time. It’s dragging parts of the industry kicking and screaming into the 21st century.
What has caused the huge growth in the independent channel?
It all goes back to the recession in 2008 and ultimately to the fiduciary standard. If your elderly parents come to you and say, “We’re looking for a financial advisor to manage our life savings,” where do you tell them to go? You’re not going to tell them to go to Merrill Lynch. That’s why there has been such a big move to RIAs. There are still repercussions of the recession and there is a lasting legacy.
What are the headwinds facing independent advisors?
The average age of an advisor is around 60 years old. Certainly, we see friction with some of the luminaries that are very critical of robo advisors because they see us as a legitimate threat to the existing RIA model. Given the aging advisor workforce, the RIA model is going to change. A new generation of younger financial advisors and younger clients is going to revolutionize the independent model. The client age is decreasing. There is a wave coming and advisors are going to need to adapt and to adapt they will need to adopt new technology.
Will technology giants like Amazon or Google enter wealth management?
It's unlikely. I view wealth management as more of a relationship-based business and those companies aren’t fundamentally relationship companies. They are transactional companies. That could change. Now that Amazon has physical retail locations maybe they will do business a little differently. I just don’t know how people would feel about the large tech players handling their wealth management needs. With Google and Apple, I think, you’ll see more point-type financial services payment like credit cards.Maybe they’ll add offerings within lending, like firms that offer student loan refinancing or credit cards.
Amazon is a provider of disruption. Amazon Web Services (the cloud computing platform) has allowed us to build at the scale and at the pace that we needed, so that certainly is a driving force of change in financial services. You used to have to have a data center and now firms can gain scale very quickly. That is where I see Amazon and Google gaining more ground. Tech companies will definitely get involved in the wealth management food chain, but somewhere that’s more transactional.