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Will wealth management get 'Instagrammed?' Q&A with In|Vest speaker, Capco's Phillip Klein

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Q: What's your take on all the efforts dedicated to automating wealth management? Even hedge fund strategies are now being automated and presented at low-cost to the mass market investor.

A: PHILLIP KLEIN: Look at Instagram, that’s a great model. You once had very expensive, clunky, digital editing software for photos. Just 10 years later, it’s free in an app in your pocket. And it works. Why won’t wealth management go the same way? I’m not saying it will, I’m just saying you can argue that point. We’ve seen it already, right? For example, Robinhood, a free brokerage app. You’ve got a free brokerage in your pocket you can use to buy and sell stocks. JPMorgan just launched something similar with You Invest.

Then there are the tech giants, the FAANGs, Facebook, Amazon, Apple and Googles of the world. These leading tech firms are already moving into financial services and potentially pushing financial offerings. They have a level of consumer data and an understanding of consumer situations that a bank doesn’t. You’re seeing how regulation is potentially opening up access to bank data, and you’re seeing firms like Amazon and Apple, who really understand consumers, build technology and propositions better than financial services firms.

When you think about millennials and other generations, such as Generation Z, they’ve grown up on these firms. They have an innate loyalty of these firms beyond the brand of the banks. If you have an Amazon or an Apple offering wealth management, able to target you with artificial intelligence and better data, better algorithms and better digital propositions, and a brand that is better trusted by millennials and Generation Z, they’re going to be very fierce competitors.

At some point, does the service model for mass market and high-net-worth flatten? That regardless of client size, everyone will get their advice through digital means first?

Let me answer yes, but let me explain why. The overall platform could very well be the same, but the difference is in the journey. So how a high-net-worth individual conducts their financial journey is different than someone in mass market. Technology allows firms to create increasingly personal journeys for these investors and you can do it at scale. Through AI and analytics, you can create an intimacy because you understand them so well. So whether you’re mass market or ultrahigh-net-worth, there’s a personal journey that’s you. Build that experience for every individual, no matter what their wealth, that’s the key.

The ‘human touch’ factor is put forward as a defense against automation in wealth management. Can that be surmounted by engineering?

It’s a question that’s broader than wealth management. When are we going to be able to interact with artificial technology and not know whether it is a human or not? When AI can build upon itself, exponentially faster and better than humans can. That’s all about time. Is it five years, ten years, fifty years? There’s arguments around each around what’s the pace of change and level of adoption. Regarding conversational AI technology and natural language processing, in some of the work we’re doing right now, we’re seeing when you onboard a client through Amazon Alexa, there’s almost a mirroring by the AI to build rapport with the client, based on a client’s temperament, their pace and their voice. Right now, we’re seeing AI used to empower the advisor and the investor. There are those who really lean into AI and think it’s an advantage in of itself. It’s really to scale what you already have.

One could say there’s a split effort in the industry, though. There is the effort to build tools meant to empower the advisor. And there is another building tools that could potentially usurp most of an advisor’s functions. Within the industry is this unspoken dichotomy.

If you think about the mass market segment, a B2C robo can suffice with a very limited human touch. But technology isn’t good enough yet to replace advisors in the higher segments. They are needed for the human touch; you don’t have AI powerful enough to be an advisor. So what you’re seeing is technology being applied to help the advisor scale and grow their share of wallet through digital tools. The advisor is assisted through tools to direct their clients to behaviors that may be better for them. It is a challenge for wealth management firms, though. They need to be able to provide that comfort to the investor, that someone is going to be there when needed. But they also want to limit the amount of humans that they need if clients desire that access.

The level of automation in advice is changing though too. As some firms have revealed, the ultimate ambition is to take it from one aspect — investment advice — and apply it to your entire paycheck. All done constantly and in real time.

Yes, and another thing to think about is consumer behavior. You now live your life digitally. There is an ecosystem, which is all the apps that you use. You don’t want to have to go out into someone else’s ecosystem. You want them to be part of your ecosystem. That’s the game that each firm has to win; how do they become part of the digital ecosystem that you live in.

Is there some uncertainty in the industry about just how to serve the future client, and is that playing into the offerings and the technology that is currently being developed?

It depends. Firms are all at different stages of the transformation lifecycle. We’ve seen it through the evolution of the robo advice market, from Betterment first partnering with Fidelity through B2C robos becoming B2B. Firms recognize they can pursue or acquire whatever the trend in fintech is. They can get to market quickly with an offering through a partnership or an acquisition, because developing in-house, especially for these tier one firms, is a long journey. So they are making bets, absolutely, but it is challenging for them to make very transformative bets due to the high cost of transformation. Then for the firms that are leading the pack, the question is, do they need to be completely transformative to continue leading the pack?

Some startups are already shuttered and some early partnerships have come under scrutiny. Was there some wisdom in not being an early adopter in wealth management?

Right now, even with the pace of change, you can get away with it. But that change is accelerating. If your firm doesn’t start keeping up, you will get left behind. There’s an opportunity for some of the lagging firms, if they can recognize where the market is going, to make some major bets and leapfrog some of the leaders. One issue I see is that some of these major firms, tier one firms and tier two firms, are embarking on a three-year transformation journey. The challenge is that in three years’ time, consumer tastes have already rapidly moved, the technology has rapidly moved. So the incumbents take multiple years to transform, and I think there’s a real risk there. It has to be managed right. They need to make sure they are extremely nimble, agile and innovating throughout that transformation. In the old world, you would define your strategy, your roadmap and your transformation plan, and you could keep on track. Now, there so much change in so many aspects within the broader market, you have to ensure you are designing and building on the leading edge.

But how do incumbents actually get nimble?

They’re all engaging in similar yet unique strategies. You can’t think of it as a one-size-fits-all strategy. They all need to find their own way, according to their unique differentiators and where they want to position themselves in the future market as well. You’re seeing a lot of strategies because there is a lot of uncertainty and ambiguity. There’s bets being played in different ways, and there’s going to be some winners and some losers.

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