Event Review

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Automated Financial Advice 2.0

What do we mean by Financial Advice?

The rapid technological advancements and the widespread digitalisation trend bring the automated financial advice to the forefront of the discussions within the financial industry. Today, it is almost undoubtable that the future of asset management will be characterised by a higher degree of automation. However, the detailed picture of the digitalised financial industry is harder to gauge. Does the financial industry move towards full automation or, rather, the synthesis of human and machine efforts, implied by hybrid models? What role would the cloud services assume? And why, in these circumstances, is employing realistic risk models becoming more important than ever before?During a half-day conference on April 19th, held in cooperation with Ortec Finance and Microsoft®, Kidbrooke Advisory® presented its stance on the topics described above. Ortec Finance summarised the key changes in behavioural patterns of customers, while Microsoft described its view on the intelligent banking, which envisions the financial industry as a seamless ecosystem operating based on intelligent cloud services. Finally, Kidbrooke Advisory moderated a panel discussion featuring leading industry professionals, who shared their views on the issues of regulatory pressures, hybrid services and future trends within the transforming industry. This document summarises the main take-aways from the event.

Depending on the degree of automation, such services can be traditional, i.e. fully performed by human staff, and non-traditional, i.e. robotic financial advice performed by algorithms. Despite the general novelty and popularity of non-traditional financial advisory, Ortec points out that traditional, non-digitalised services, are unlikely to be completely overshadowed by robotic, non-traditional financial advisory offerings because of the established culture of doing business face-to-face and receiving traditional financial services. Therefore, there is a general consensus among the industry professionals that in the medium term, hybrid financial advisory services are going to address the widest spectrum of the customers’ needs.

Automated Financial Advice 2.0

Financial advisory can be defined as providing guidance on allocation of available funds among saving, amortising and investing given customers’ risk profiles, financial goals and an available product universe.

Challenges faced by Wealth Management Industry

Regulatory Changes – A Burden or an Opportunity?MiFID II and IDD transparency regulations required many asset management businesses to make amendments to their operations. In many cases, implementing these frameworks slashed the companies’ margins by enforcing more rigorous compliance requirements. However, the industry’s view on the highly regulated environment is rather positive; the increased transparency is believed to positively contribute to the formation of inter-organisational relationships and create trust between customers and financial institutions. The representative of Jysk bank, René Schjøtt Brogaard, highlighted that the new regulations should not be viewed as a cost inflator, but rather as a game changer, which can be leveraged. He further underlined that it is increasingly important to collaborate with new actors in these circumstances.

Simplicity – The abundance of compliance frameworks and technological evolution motivate the industry to create complex products. However, the event participants agreed that a contemporary customer could shy away from using a financial product if the process is too complicated. Therefore, balancing simplicity, transparency and functionality is a major challenge that automation could be a good way to address. Privacy and Security – The digitalisation trend entails some unique challenges to it, cyber risk being one of them. However, despite the increased awareness in the industry, since cyber risk estimation data is limited, these risks are challenging to compute and manage. Quality – The customers increasingly demand high-quality digital solutions for financial services that offer fast and seamless experiences. Therefore, in the dimension of automated advice, it is increasingly important to develop better mechanisms delivering higher quality financial solutions for consumers, such as more realistic risk models, optimal fund selection tools and up-to-date compliance instruments.Human Touch – The participants of the event were conscious of the risk of going full-digital with financial advice: some categories of customers were not ready to move on from receiving human assistance. This trend was underpinned by Ortec’s customer research within the HNWI (high net worth individuals) group. The industry professionals were generally balanced on whether any particular form of the financial advice will prevail – traditional, automatic or hybrid – because at a current point each of the solutions would tap into a certain category of clients.

Customer Demands – Balancing Quality and ComplexityThe wealth management industry is challenged with rapidly changing customer demands. Generally, these trends can be summarised within the following categories.Customisation – Customers demand a greater degree of customisation of their portfolios based on personal preferences. Moreover, they tend to assume a more active role in their assets’ management, by, for instance, requesting a real-time overview over their investments. Loyalty – Some customer segments are less hesitant than ever to switch their financial advisor based on pricing, convenience and customer experience. Furthermore, customers’ willingness to pay for financial advice is likely to decrease. However, the industry professionals that participated in the panel discussion suggest that in the medium term increased transparency could contribute to creating trust between the customers and the industry, which could in turn positively affect customer loyalty.Demographics – Traditionally underserved segments exhibit increased demand for Financial Advice, but it is often the case that large industry incumbents do not offer respectively targeted solutions. Moreover, longevity concerns need to be a focal point of client-advisor discussions, even years ahead of retirement. Finally, a new generation of investors exhibit a different take on the wealth management industry, influencing how older investors purchase and use investing services. In particular, Ortec highlights this trend in their HNWI customer research, revealing that a younger generation of investors is more likely to use non-traditional financial advice solutions as well as to rate them highly.

Robo-advice Features – Getting the Numbers RightThe technological dimension of providing credible and high-quality advice is a focal point of wealth managers’ competitiveness, especially in the context of low barriers to switching providers. In particular, there are three main areas of automated financial advice features, which were discussed during the event.Consistent treatment of risk – The approach to risk calculations should be consistent throughout the entire advice process. This means that risk profile scoring, savings goal definition and product advice calculations should all be aligned with the risk model in use. Full balance sheet coverage – Firms should be able to accommodate all financial products offered to clients based on consistent and realistic scenario generation. The industry professionals stress that accomplishing this would require advanced data management solutions, which are to date represented by cloud services (such as Azure by Microsoft®).Holistic, goals-based advice – In the wake of demands for a higher degree of customisation, the challenge of achieving multiple (and oftentimes conflicting) financial goals becomes more prominent. Moreover, the issue is gaining more complexity given a growing variety of investment and funding strategies to choose from. Therefore, it is essential to develop a holistic approach to analysing the risk profile of the customer, her financial goals and the available product universe to provide best-in-class automated advice.

Internal Infrastructure – Building An Up-to-date Business ModelThe recent advancements within the area of wealth management bring up some of the issues within internal organisation of business.

In particular, the panel discussion participants the role of data management and inter-organisational relationships. These trends, along with a few others, are discussed below.Inter-organisational relationships A number of practitioners participating in the event highlighted the increased importance of various forms of cooperation within the industry. In particular, the professionals noted that technological expertise of FinTech start-ups and established customer networks of large incumbent players provide a good ground for creating and marketing robotic advice solutions. Moreover, advisory firms were recognised as crucial to success in digital transformations.Data management – The Microsoft® presentation was devoted to the evolving data infrastructure within the Financial Industry. In particular, it highlighted the importance of creating viable data management solutions throughout the organisation. Cloud services are considered to be a necessary tool to create an integrated intelligent financial institution. Tech-stack – Today the tech-stacks are often organised around products rather than customers, making it very difficult to develop new customer-centric solutions and services.Organisational structure – Oftentimes the organisational structure and financial incentives revolve around specific products. This usually means a lot of internal resistance to change the direction towards a more customer focused service delivery.

The listed challenges suggest that the only viable way to stay competitive in the medium and long term is to continually provide customers with high value-added advice that cannot be easily replicated by another party. In turn, this means supplying dynamic advisory services that adapt and change according to the customers’ demands.

Put The Customer FirstThe financial advisers need to wholeheartedly commit to the customer focus and reflect this commitment in their belief system rather than reducing the strategy to purely cost-cutting solutions. This implies that the fees need to correspond to the value added by the services and firms should aspire to recommend the most suitable products given the individual risk profile of the customer. A more granular approach to this type of solution is described below:

threat from the large platform players (Google®, Apple®, Facebook® and Amazon®). Given the exacerbating cyber security threats, we believe that financial institutions have a reputational advantage over these platforms when it comes to protecting the customers’ personal data.

Start Simple and Plan AheadThe financial advisers may begin with providing a simple robo-advice solution (but value-adding) like advice for new money only, but they should make provisions to have the stamina to deliver full balance sheet coverage over the coming years. By introducing automated services to drive both self-service and physical channels, companies can restrict their dependency on physical advisors. It is also important to tap into the demographic trends by establishing self-service relationships with younger customer categories early on.Modular approach – The adoption of a modular approach during the process of creating a core advice platform enables future flexibility in terms of customer journeys and specific applications.Consistent treatment of risk – It is important to establish the consistent treatment of risk through the entire advice process because it would be difficult to make corresponding amendments at a later stage. Narrow functionality within this area would restrict the ability to move fast into new areas of advice.Plan ahead – Companies would benefit from building a visionary but realistic roadmap, without shying away from novel issues and challenging decisions. Even though the adoption of a feature can be postponed, it is helpful to start looking for a solution early on: modifying old tech-stack is sure to be expensive and cumbersome.

…the only viable way to stay competitive in the medium and long term is to continually provide customers with high value-added advice that cannot be easily replicated by another party. In turn, this means supplying dynamic advisory services that adapt and change according to the customers’ demand.

Channel-consistency – The Advice Experience should flow seamlessly throughout the channels. This can be achieved by, for instance, enabling assets value and risk monitoring between the meetings with a physical advisor. The firms should strive to provide consistent advice throughout all the channels and the fees should vary according to the value added rather than in accordance to channel.Fee-structure – The fee structure should be closely aligned with the value added by each service or product. Such approach will be more viable in the medium term in part due to MiFID II requirements, which influence the companies to disclose the fees structure and equip the customer with higher levels of bargaining power regarding the costs of services.Data protection – The financial advisers should make sure to take advantage of the rising demand for greater data security in case of a

Suggested Solutions

The typical financial advice given by a physical advisor or a pension scheme service encompasses the following features:Static what-if analysis – The user receives a static what-if analysis, typically based on a 2.1  % assumed investment returnLow value-add – Even though the customer receives the initial advice, there are usually scarce or infrequent follow-ups or updates of your investments. However, customer continues to pay AUM-based fees.Conflicts-of-interest – Unfortunately conflict of interests is still present within the wealth management sector. For instance, products recommended are at least partly based on the revenue potential for the supplier rather than the best interests of the customer.

Automatic pre-population –Full automatic pre-population of information, of all aspects of a customer’s existing balance sheet and expected cash flows – from all suppliers. If this can be achieved, convenience will improve sharply. The ways of resolving this issue in the Swedish market have began to emerge perhaps using a future API-enabled version of Min Pension or the newly announced Tink API to gather this information automatically.Transaction tracking – Customer and savings goal-centric transaction tracking with granular historical PnL and performance, full monitoring of performance, risk, goal feasibility etc.Hybrid approach – Firms could implement a hybrid approach, combining traditional with automated advice. Such an approach could address all customer segments: customers with a lower lifetime-value (LTV), HENRYs (high earners, not rich yet) and HNWIs. The participants of the panel discussion have agreed that different customer segments may require different degrees of digitisation and customisation of services, and the human interaction may remain an integral part of certain category’s customer journey.Automated governance – When all provided advice is based on a core wealth management or financial planning engine all inputs to the advice and the results of the advice is digitally available. This means that quality and limit controls and other compliance functions can easily be automated. It is even feasible to benchmark any remaining advisor freedom against the automated advice in order to monitor the quality of advice real time (and this goes both ways).

Consistent treatment of risk –Automated advice can deliver a more consistent treatment of risk throughout the whole financial advice process. This is done through risk profiling, which considers both rational and irrational factors, savings goals defined according to customer targets and conditions, the investment suggestion based on a realistic view of future risk-adjusted returns, and customer-value-add of investment products unequivocally explained through quantitative measures. Unless this process is performed correctly, the advice that such solution provides may be of lower quality.Consistent pricing models – Products with a higher value-add should be attributed to a higher price than lower-quality products.

Today

Tomorrow

Present and Future of the Classical Approach to Wealth Management

What are the features of the current state-of-the-art practices of financial advisory, at least in a way it is portraited by the media?In some cases, a user interface based on natural language processing guides the user through the customer journey;Prices or returns of selected instruments are modelled using a normal distribution, while the risk model is usually calibrated using only historical data;Sometimes mean variance optimisation is used to determine the values of available portfolios.Risk categories – Customers may be categorised into three or more risk categories, and then they are presented with a suggested investment solution based on a mix of model portfolios either based on ETFs or regular mutual funds depending on the degree of cost-consciousness of the specific service.Simple rebalancing – In some cases customers are offered automatic rebalancing, which entails keeping the portfolio weights optimal over time to ensure that the selected portfolio maintains its risk level.

by a human advisor. For example, during a conversation about the occupational pension scheme of his/her company a client could throw in a question about the mortgage offers currently available. The interface needs to be flexible enough to seamlessly switch context from one customer (a company) to another related customer (the owner of a company). The industry professionals at the panel discussion believe that this state of AI will not be achieved some time in the near future, and they expressed concern about investing too much resources at once to such a risky innovation-driven project. Besides predicting the meaning of natural language input from the customer there are more direct examples, e.g.• What if we could predict the next

credit card transaction?• What if we could predict the

balance sheet of a customer in 10, 15, or 20 years time?

Cost efficiency – Automated advice can significantly lower the cost of providing financial advice, thereby enabling providers to effectively lower fees to become more competitive, stay profitable long-term and capture new market segments

Advice improving over time –Ongoing self-improving advice through Machine Learning (AI) based on investment success and structured customer feedback on provided advice. It is dangerous to rely too much on trying to provide the “best risk adjusted returns” because it is a hard problem to solve.Powerful prediction – Natural language-based user interfaces with the flexibility of a physical advisor. Customers would aspire to receive similar experiences to those provided

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Tomorrow

Wealth Management State-of-the-Art of Today and of Tomorrow

PartnerManaging Partner PartnerEdvard SjögrenFredrik Davéus Lars Larsson

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