Technology is already revealing itself to be a big game-changer in the financial services industry. We are seeing numerous examples of innovative activity, with clients throughout the world continuing to evolve in order to address changing regulatory environments, challenging markets conditions, and increasing investor expectations. Digital disruption is bringing about innovative changes to distribution, sales enablement, and the customer experience.

"Technology will set the winners apart"

Democratization of Investing

Too often, retail investors get left behind when it comes to accessing the most cutting edge technologies and investment strategies. However, digital advice is poised to disrupt traditional wealth management with the promise of increased convenience, greater transparency, lower fees, and better service. Although penetration levels remain relatively low, its prevalence is increasing as more providers come to market with these services, and as the technology continues to improve, this will evolve rapidly.

As digital services become more mainstream, it’s important that the financial services industry continues to explore how it can enhance their service offering to clients. We need to push the boundaries of how technology can help people build better financial futures.

Using technology to monitor investments and retirement savings encourages people to take action to improve their financial futures or to adjust to a more realistic understanding of their finances. Enhanced access to data, modeling and analytical tools are increasingly supporting investment decisions, including portfolio creation and management. Technology can empower investors with tools and data to grow savings more effectively and efficiently, and help them plan for retirement, pay for school, or buy a home.

A recent survey of 4,000 Americans by BlackRock found that 89% of those who manage investments using technology can name a way it has had a positive impact on their behavior as investors.

The rise of digital advice presents some distinct challenges and opportunities, for instance adding potential for greater operational simplicity whilst accelerating fee compression.

"Digital advice is not just a millennial phenomenon. Good technology finds its way into the hands of all different generations"

Operational simplicity and client engagement

The application of technology services can be advantageous for financial institutions by automating routine aspects of the client servicing process. Digital systems also provide advisers with greater channels of communications to their clients and increase engagement. Advisers are learning how to articulate a service-based value proposition and re-structuring their businesses accordingly.

There is demand for systems, processes and insights to support advisers in producing appropriate, customized and robust portfolios, and investment solutions for clients. Digital advice also requires the ability to process increasing levels of data on a unified platform. This is where technological solutions can assist, particularly in the administration of client portfolios where wealth providers have legacy internal systems which were not designed to handle current data or reporting requirements.

The overall ecosystem is shifting such that the wealth industry are investing heavily in enhancing their technology capabilities. In order to empower their advisors with institutional quality risk analytics and modelling tools, focus should be on technologies to fill this need for the retail investor, including technologies that empower the financial advisor with data, risk engines, portfolio construction tools in end-user friendly offerings.

Technology that has been previously available to institutional investors, particularly around portfolio construction and risk, is being adopted by banks across the global market. But it is now also at a price point that makes it viable. The effects of fee compression are likely to make advice and portfolio construction, not sales and products, the key drivers of provider margins.

Best practice

Digital tools, when combined with human advisors, can also provide a new, scalable means to help bridge the increasing advice gap. We see regulatory and investor benefits to greater penetration of digital advice. These models provide greater transparency for products and advice, lower investment cost, mitigate behavioral biases, and improve investment professional standards.

‘Thriving in this new world requires the best people, the best computing systems and the best algorithms – all working together. It’s not “either / or.” It’s “and”

We see the following as key areas for consideration in digital advice:

  1. Know your customer and suitability: The rules on suitability requirements apply equally to digital advice, though the means of assessing suitability may differ somewhat.
  2. Algorithm design and oversight: Digital advisors should ensure that investment professionals with sufficient expertise are closely involved in the development and ongoing oversight of algorithms. Algorithm assumptions should be based on generally accepted investment theories, and a plain language description of assumptions should be available to investors.
  3. Disclosure standards and cost transparency: Like traditional advisors, digital advisors should clearly disclose costs, fees, and other forms of compensation prior to the provision of services. Digital advisors should similarly disclose relevant technological, operational, and market risks to clients.
  4. Trading practices: Digital advisors should have in place reasonably designed policies and procedures concerning their trading practices. Such procedures should include controls to mitigate risks associated with trading and order handling, including supervisory controls. Risks associated with trading practices should be clearly disclosed.
  5. Data protection and cybersecurity: Digital Advisors should invest and prioritize in cyber defenses, information security tools, and employee awareness to protect and defend their business and client information. They should take advantage of shared collective intelligence focused in this area via forums and organizations such as FS-ISAC and NCSC.

Winning attributes

The evolution of digital advice is still in its very early stages but these services have the potential to disrupt the existing financial adviser model by providing customized investment tools to individual investors at a relatively low cost. We believe there are key aspects that will define the landscape for the winners in this new space such as mobile enabled models, account aggregation, regulatory technology, and the ability to digitally analyze portfolios for costs and correlations.

Across the globe, we are already seeing a shift away from independents to more established players building digital advice offerings, where they can bring their brands and existing client acquisition capabilities to bear.

However, the ultimate objective is to continue to transform how technology is used by asset and wealth managers to better serve their clients – the end investor.

Kathryn's white paper is part of the Fund Technology, Data & Administrator Operations, APAC 2017 report. You can download your free copy here.

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