As a college freshman I was sidelined by a bike accident that left me with a broken arm and without a job. This setback might not seem like a stroke of luck, however the experience taught me invaluable lessons about innovation adoption, preparing me for the transformative changes underway in wealth management today.
Reflecting on my involvement in healthcare innovation that followed, I see parallels with the current landscape in wealth management. To thrive amidst the ongoing intergenerational wealth transfer and evolving client expectations, financial practices must embrace new and significantly improved technologies to retain existing clients and appeal to a younger, more discerning demographic.
A Rising Tide Lifts all Boats–and Client Expectations
Losing my restaurant job due to the bike accident led to a serendipitous opportunity working for a prominent oral and maxillofacial surgeon. Despite my young age, he mentored me for a challenging role in his practice, exposing me to cutting-edge medical technologies, the medical diagnosis model, and the dynamics of consumer preferences. This shaped my understanding of medical innovation and provided insights into the role of technology in wealth management today.
I watched how technological innovation got adopted by the tech-savvy, then the entire market slowly adopted until it became the new standard. This was the case with in-office 3-D imaging, dental implants, and other exciting technologies that made the previous standard of care look medieval.
Patients gravitated towards practices that invested in better technologies. These clinical tools had direct implications for their health, but they also trusted the doctors using that technology. Client expectations shot up, and practices that didn’t adopt new technologies struggled to get new patients, while the practices that adopted them flourished.
There was a practitioner who didn’t wear clinical gloves, and used the same x-ray equipment that he opened his practice with in the 1960’s. His patients skewed much older and he didn’t do many new patient exams. His technological choices reduced practice value and made selling the practice or onboarding a junior practitioner difficult. The goal of financial advice and insurance practices is to be the practice people want to join.
History doesn’t repeat itself, it rhymes
Beyond my anecdotal experience in healthcare in the early 2000’s, let’s take a look at some businesses that failed to adapt:
- Blockbuster refused to change its approach, declined to snatch up Netflix, raised prices when the world started adopting streaming services, and in the end, declared bankruptcy.
- How about Kodak? Despite the fact that their own employee developed the first handheld digital camera in 1975, executives were reluctant to pivot towards digital due to the heavy investment and cannibalize film sales. Despite the huge lead, it went bankrupt in 2013.
- BlackBerry led the race in smartphones only to get pigeonholed as a business phone and wasn’t able to embrace the touchscreen preference of users or the desire for apps.
- Despite Nokia’s remarkable hardware (while rock climbing, my friend’s Nokia 2100 fell 50 feet onto a boulder, bounced, and worked just fine), the company failed to anticipate the impact of smartphones. After suffering heavy losses, Nokia eventually sold its mobile phone business to Microsoft in 2014.
If we take this view to the wealth management industry, we can see the formation of a similar pattern. So let’s write our own story and be sure we don’t end up as a bullet point in a long list of defunct businesses that failed to adapt.
It’s worth reflecting how your own practice stacks up in terms of innovation adoption and preparation for changes in expectations and consumer preferences. Are we creating a practice that is growing and therefore more valuable, and attractive to junior advisors?
Fintech for Financial Advisors
We are fortunate to live in a new world with new technology that enables and empowers client-level customization and integration like never before. However, being a financial advisor today is more difficult than it used to be.
Margins are getting compressed, competition is fiercer, compliance more limiting, and issues such as perverse incentives and unflattering research raise concerns about the vulnerability of the financial advice and insurance business to technological disruption.
Consumers are justifiably anxious about inflation, net job losses, and a host of unsettling global, macro and geopolitical trends beyond their control. Every day there is an announcement about AI that forces us to rethink the way that we work.
But instead of jumping to Terminator-like outcomes, we should think about how to harness technology in our own professions to improve our ability to better serve clients.
My approach to fintech borrows heavily from healthcare’s information integration and interpretation phase leading to optimal treatment. It is also based on my experience as a finance professor and researcher by leveraging consistent findings from behavioral economics that show humans have decision blind spots that wreak havoc on their financial lives. Finally, I seek to make it easy to use for busy practitioners in their own workflows.
The goal is to empower financial advisors’ and decision-making processes towards repeatable results and demonstrate value to clients. Coupled with a client-centric ethos, the behavioral fintech approach holds the potential to restore trust in financial advisors that adopt them and strengthen the overall financial services industry.
There is a dizzying number of firms offering “solutions” to financial advisors. From risk profiling to time management to automated lead generation, it’s difficult to keep track of multiple systems, much less integrate them seamlessly into an effective and repeatable workflow.
Each financial advisor is unique and every practice has its unique priorities, so how to prioritize?
- Seek win-win situations for both client and the firm
- Maximize client upside to mechanically to increase AUM
- Prioritize tools that provide customized products and services and integrate information to get a complete picture
- Leverage reliable science and provide consistent and measurable results and materially differentiate your practice
Solving the Trust Crisis in Financial Services
After the global financial crisis, there is a new generation of consumers with developmental experience of an unreliable financial system. There is a lack of transparency around digital products, fees, and technology which has eroded trust in wealth management. Clients seek to preserve and grow their wealth in an increasingly complex world, and it’s up to us–”the industry”–to build trust as it is the ultimate currency.
Just like what I saw twenty-plus years ago in healthcare, innovation can enhance trust within the financial sector. Firms introducing meaningful innovations are perceived as responsible and trustworthy, and fintech in particular builds trust by providing a better user experience for investors and leveraging aggregated user data to make informed decisions.
My focus at Prof of Wall Street is to empower human advisors to make superhuman decisions and serve their clients with the leading edge technology. In the same way that better imaging technology led to greater trust and better treatment results, behavioral fintech can build trust with clients and lead to better results.
Wealth Transfer: How to Win The Long Game
The historical good news is that retention has not been a significant challenge for most advisors.
But here is the bad news:
Client money that has been “sticky” for decades might get dislodged and be won by new financial services options as consumer expectations are rapidly changing.
What’s also rapidly changing is the customers themselves, as the unprecedented wealth transfer from baby boomers to their heirs is already underway, with $84T is being moved from seniors to their heirs over the next 20 years.
People are becoming increasingly concerned about fees, poor performance, and lack of transparency (not an x-ray joke, I promise). Preferences among younger financial customers differs from their parents’ and skews higher tech and lower cost. The advisor that served Baby Boomers is unlikely to impress Gen X, Y, or Z any more than bare handed dentistry.
Fifty to 60% of advisors will be over the age of 65 by 2030. To build a business that others want to join, we must provide prospective junior colleagues with a promising future in this industry. We do this by being leaders in product quality, technological innovation, and taking an unflinching view of the risks ahead. If we fail to do so, it will be difficult to recruit talent and provide customers the trust and quality they need.
Research continues to be published suggesting that client best interest is not often met by advisors and little economic value is provided. So be the practice that demonstrates client-focused care through customized products for their life stage and in accordance with their behavioral preferences.
If you’ve read this far, you probably are doubting that future successful practices can rely exclusively on “tried and true” approaches without adapting to these forces.
The path forward to win the long game of wealth management involves taking measured risks to adopt materially beneficial technology that improves the value-add for services, balances client needs with institutional efficiency, and has a forward-looking view of compliance and regulation.
The solution is not to fight against human nature that desires to know what’s going on behind the scenes, but to accommodate it. Clients want financial services firms to rise in innovation standards and value delivery along with healthcare, transportation, and entertainment.
So let’s give it to them.